Feb

22

Aside from the obvious answer which is to make money, what do dailyspecs think is the key to managing money? Is missing a big up move better/worse than missing a big down move? Meaning, if a long equity focused fund manager was flat in 2008 but underperformed in the recent move is that good or bad? It seems that if you play strong defense you often times don't catch the big moves. Similarly, if you are all offense your drawdowns are far greater. There are, of course, specifics to each style, but I am thinking more generally regardless of method or style.

Ralph Vince writes:

George,

If I may….

"the obvious answer which is to make money"

Is a crazy, amateur answer. Anyone who claims THAT, is here just for entertainment (which does not mean they are playing just nickel dime either, but likely playing TOO heavy).

The number one rules is to answer what you ARE here to do. If you were running the LMNOP corp's pension…how would you define that?

If you were in a trading contest, you would have a different criteria. What would it be?

If you were managing money for granny, wouldn't that be different than a 22 year old kid with a little grubstake's criteria?

How can you have a plan, a map to get somewhere, when you don't know precisely what you are trying to accomplish, where you are trying to go. I know it may sound trivial, but that's step one. Otherwise, you just flounder.

By the way, when people say ".. to make money,: I have found that usually means they need to "make money," to cover their obligations, which is a LOT different than making money to increase their capital (i.e. their obligations are already covered). Those are tow different ballgames, and to me, to have to trade to cover your nut, is not the way to trade. Not for me anyhow, it;s a tough enough game without that on top of it!

A commenter writes:

My first thought, FWIW, is discipline and hard work. It's like much else in life. There are naturals, to be sure, but for the rest of us, in any endeavor in which one seeks success, there's nothing like discipline and hard work.

Timothy Collins writes:

If I HAD to choose, then capital preservation wins out. Fear and greed drive just about everyone, but I've found fear outweighs the greed. There isn't one right answer. It depends, but here is what I can tell you. If you start managing money during a time where we've had sideways action or a very slow climb or even very bullish action, folks are going to want you to outperform. If there hasn't been a recent correction or scare, then greed takes over. If you underperform, they will leave you. You can survive the first major downside move, usually, and keep most of the assets you manage. However, there will be a heighten expectation of communication, hand holding and reassurances that they next drop they won't lose as much, if anything.

If you start managing money during or shortly after a sharp decline, then most of those individuals are probably looking to make a change because they were hurt badly. They will want capital preservation, so underperformance in an up market is somewhat tolerated. Clearly doing 1% when the total market does 15% won't be acceptable, but if you deliver a decent up year during those times (say 6-8%) but avoid losses during 5-10% downswings and greatly minimize during big drops (15%+), they will be very loyal even if you underperform on the upside for several years in a row (3-4 even). People tend to remember and be loyal to protectors.

Just my view of course.

a commenter writes:

This is a superb question and one could fill an entire career answering it. It is the money management equivalent of "Does God Exist?" for a theologian. Belief in one sort of God on one sort of Continent will get you high praise, many parishioners, and a spanking nice Cassock. On another you'd be branded an Infidel and your kippah kicked in the sand. Although the asset management industry has a tendency more towards the Heaven’s Gate end of the spectrum than the Abrahamic.

another commenter writes:

Capital preservation is very similar to when one is playing a strong defensive game and in top shape. Even a player with a weak offense, if he has a strong defense, that and fortitude can grind the opponent down.

Alex Castaldo writes:

The business of money management requires two separate things: first the ability to attract (and retain) Other People's Money (OPM), and second the ability to successfully invest/trade. In my experience it is rare for one person to be good at both, so to have a successful firm you probably need some people who are good at one and some who are good at the other.

Raising money involves marketing skills and also good communication with the clients so you understand what the client wants and so you keep the client informed/reassured about what is going on (even when they should be worried instead!). Basically these are people skills.

For investing/trading on the other hand you need the ability to see things differently from others (so called "variant perception", seeing things that are true but that other people don't see). This skill is partly an intellectual skill and partly guts/courage to do things your own way rather than follow the consensus.

Nov

28

First consideration, have a customer who is willing to pay. If you have that, you have a business. Without that, you have an idea and not a business.

Second, be willing to amend your plan(s) in whatever fashion in order to accomodate what the customer is looking for.

Third, don't listen to anyone–naysayers, govt regulators or other douchebags– just go, do it.

Jeff Watson writes:

It might be advantageous to consider the possibility of finding a business near bankruptcy and doing a turn around. Failing businesses like pizza and bagel shops and others can often be bought turnkey for pennies on the dollar (the owner is selling equipment before the creditors can attach it), moved to a new location and turned around, or liquidated.

Plenty of people go into business without enough specific knowledge, capital, a business plan, proper help, quality product, or a realistic price list. They compound these mistakes by not watching their pennies, mismanaging inventory, having over optimistic, unrealistic expectations. They also might place too much trust in their employees and not notice what's going out the back door. Many don't realize that running a business is 24/7 and every small detail counts. I've seen small business owners who don't even know their raw material costs or how to figure a gross profit. I've also seen people go into business not knowing the size of the market which can be as deadly in a brick and mortar business as not knowing how much wheat is for sale at any given time.

A further note, speaking of gross profit, if I walk into a small business that is always disorganized, messy, poor sanitation, dirty windows, I would readily make a wager that the business also has a gross profit problem and probably much worse. I am always on the lookout for these types of opportunities, since being a silent partner in a properly managed turnaround situation can be very profitable. It's the ecology of the business world, just like in the markets…the strong eat the weak.

George Coyle asks:

Ralph,

Re: your 1st consideration, I assume you just mean end market demand for whatever it is you are selling. If entrepreneurs waited for the end market demand to cover costs I would imagine the majority of businesses that exist today wouldn't.

Ralph Vince writes:

I mean before you go to sell or market something, find at least one person who tells you, "yes I will buy THAT at THAT price," and tell them you;ll be back with it tomorrow, or whenever. But make the sale, whether you are selling vats of mustard or something that has never been sold before. If you are going to consult — don't go into the consulting business, get a customer to pay you for something. Now you are a consultant. Do not go into business and wait for a sale
– that's doing it backwards.

Vince Fulco writes:

Ralph- the latest craze in the start up world of 20 year olds is developing a minimum viable product. MVP, which is the barest of bare bones app/site/product, gets customers to sign on and then one goes about building out the real infrastructure. Think of fake storefronts with no sides or back walls. Frankly, some of the truth stretching to get paying customers on board makes me conjure up carny barkers. Similar to the HF/FOF world, most experienced business people never, ever, ever want to be the 1st customer. How do you surmount that hurdle?

Vinh Tu writes:

Look at Kickstarter. there's no pretense, really: people are pretty upfront about the fact that they're at a stage where it's mostly a webpage, maybe a prototype or half-baked product. And in some cases people are still willing to kick in the cash.

Vince Fulco adds:

Oct

23

I have been wondering, is there any strategy for slots? I know there is a lot of strategy for blackjack and other casino games that is applicable to trading but I've never really read about/considered slots. My quick online searches returned nothing very scientific. I assume slots have a routine (low) payout ratio. I wonder how random the results are (the conspiracy theorist in me is highly skeptical, especially of video slots).

It seems the time to play would be after a string of losses as the payouts do need to come. Sort of like counting in blackjack, you could watch other players on machines, wait for them to lose a lot and potentially assume the odds were going up. It also seems (much like old horse racers) the best recipe would be to bet a consistent amount. Watching players I see bet sizes swinging all over and a lot of loss. Usually it is bet big, lose, reduce size, win, up size, lose, repeat until broke.

Bets could vary but only as a constant function of capital (I.e. 1 with 10 in capital, 2 with 20, etc). This would be subject to casino limits but would probably beat changing size due to martingale risk. I also figure different machines would have different odds. Best to play the machines with the highest odds. The scratch lotto for example publishes the odds of their games in ny, I imagine one could find similar publications with slot odds.

Next I wonder how stop losses could be tied in. Would it be best to use a set number of losses to move to the next machine. When playing with house money should you let it ride or use a rolling stop. Rolling stop sounds better. Also if you had a big win it stands to reason that machine was not going to be paying out big soon so you should cash in and move on.

This all may be virtually impossible too unless there were teams working in shifts (people have to sleep) but casinos don't.

Welcome any thoughts or ideas. I know slots aren't sexy like table games but the anonymity and lack of fellow players makes them fun at times (but it would be more fun to walk away up money).

Will Weaver writes:

If slots are random they don't have a 'quota' of payouts… and as in flipping a coin, every iteration holds the same probability. So there shouldn't be any advantage. But I know nothing about the machines other than they probably are not completely random, though closer than would generate an edge.

Sam Marx writes:

If they are electronic slots, I believe they use some sort of random number generator. So I've had the theory that if there was some way to determine the formula used, then they might be beaten.

Craig Mee writes:

Watching the payout numbers on a screen a long time ago when a technician was working on one– this was a poker slot– showed the payout to be approx 80% before double up, and after double up it went down to the low 60% if memory serves me correctly. When playing I took the strategy of banking all my small wins due to this, and doubled up on any large wins i.e 4 of a kind and the like. From there I would work a stop at flat after doubling the stake (if I won my doubles) and then a trailing 20% stop of total win one tripled my initial stake. It seems to let you have a plan, and walk away, rather than the guy next to you, tipping money into that feeder all night. If you must play, then having a plan of attack is the most important aspect, so you bank or your stop goes off …quickly…and you're out of there.

Jeff Watson writes:

There s one great slot strategy that hasn't been touched on. The best way to win at slots is to not play at all. Even the places that offer 98% payouts. What they are really saying is that for every $100 you feed through the machine, you will get 98 dollars back. The vig is too tough for me, or any other sensible person, for that matter. One has noticed that the really easiest games of chance usually have the highest vig. Things like wheel of fortune, chuck-a-luck, slots, and keno all have outrageous vig and should be played by no one. Save your money and go to a great show.

Pitt T. Maner III writes:

Along the lines of the slots thread, here is some info about roulette strategy:

1) Under normal conditions, according to the researchers, the anticipated return on a random roulette bet is -2.7 percent. By applying their calculations to a casino-grade roulette wheel and using a simple clicker device, the researchers were able to achieve an average return of 18 percent, well above what would be expected from a random bet.

2) "There have been several popular reports of various groups exploiting the deterministic nature of the game of roulette for profit. Moreover, through its history the inherent determinism in the game of roulette has attracted the attention of many luminaries of chaos theory. In this paper we provide a short review of that history and then set out to determine to what extent that determinism can really be exploited for profit."

Chris Cooper writes:

The most obvious and effective countermeasure is to disallow betting after the ball is released. The casinos allow betting after release because customers like it, but if they have any doubt it is a simple matter to change that practice.

Secondly, Thorp's original work (and mine) were based on finding wheels which were not quite level. After he hit a few casinos successfully, he found that the number of out-of-level wheels decreased. The paper cited in the original post details an approach for level wheels, but notes that more accurate timing is required.

Plus eV roulette did make it to book form, if not the front pages, by a group from Santa Cruz. More recently, a Hungarian was purportedly successful to the tune of over one million. My paper many years ago is lost to the ages, but in any case you can learn much more by reading the paper cited in Mr. Maner's post.

Oct

1

What are the common errors, the improprieties, the lack of attention to proper mores, the p's and q of trading that cause so much havoc and could be rectified with a proper formal approach? Here are a few that cost one fortunes over time.

1. Placing a limit order in and then leaving the screen and not canceling the limit when you wouldn't want it to be filled later or some news might come out and get you elected when the real prices is a fortune worse for you

2. Not getting up or being in front of screen at the time when you're supposed to trade.

3. Taking a phone call from an agitating personage, be it romantic or the service or whatever that gets you so discombobulated that you go on tilt.

4. Talking to people during the trading day when you need to watch the ticks to put your order in.

5. Not having in front of you what the market did on the corresponding day of the week or month or hour so that you're trading for a repeat of some hopeful exuberant event which never happens twice when you want it to happen.

6. Any thoughts or actual romance during the trading day. It will make you too enervated or too ready to pull the trigger depending on what the outcome was.

7. Leaving for lunch during the day or having a heavy lunch.

8. Kibbitsing from people in the office who have noticed something that should be brought to your attention.

9. Any procedures that violate the rules of the British Navy where only a 6 inch plank separated you from disaster like in our field.

10. Trying to get even when you have a loss by increasing your size and risk.

11. Not having adequate capital to meet any margin calls that mite occur during the day, thereby allowing your broker to close out your position at a stop while he takes the opposite side. What others do you come up with?

Jeff Watson writes:

I don't know if it is an error or a character flaw, but freezing will create mayhem with your bottom line.

Based on recent empirical evidence which suggests that as investors gain experience, their investment performance improves, we hypothesize that the specific mechanism through which experience translates to better investment returns is closely related to learning from investment mistakes. To test our hypotheses, we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover, suggesting that investors learn from overconfidence. We conclude that compared to other investment mistakes, it is relatively easy for individuals to identify and avoid costs related to excessive trading activity. When correlating experience with portfolio returns, we find that as investors gain experience, their portfolio returns improve. A comparison of returns before and after accounting for transaction costs reveals that this effect is indeed related to learning from overconfidence.

Kim Zussman writes:

Trading a market, vehicle, or timescale that is a poor fit for your personality, temperament, and utility, exacerbated by self-deceptive difficulties in determining this.

George Coyle writes:

Speculation by definition requires some amount of loss otherwise the game is fixed. However, I believe loss can be broken down into avoidable loss and unavoidable loss. Unavoidable loss is, well, unavoidable. But in my personal experience (and based on pretty much all speculative loss I have seen or read about) all avoidable speculative loss is traced back to some core elements/violations: not being disciplined (many interpretations), getting emotional and all of the associated errors and mistakes that brings, sizing positions too big so that regardless of odds you eventually have to reach ruin, not being consistent in your approach (the switches), not managing your risk adequately either via position sizing or stop losses, finally you have to be patient for the right pitch whatever that may be for you.

Jason Ruspini writes:

A similar distraction comes from making public market calls.

Jim Sogi writes:

The Sumo wrestlers' trainers in Japan are conscientious about avoiding mental strife in their fighters since it affects their performance. Sometimes when other life issues intrude, like getting up on the wrong side of the bed, it is better to refrain from entering a large position. You're off balance. How many times have I thought to myself, "I wished I had just stayed in bed this morning"?

William Weaver writes:

Mistakes I'm working on:

-execution error
-having too much size too early — the first entry is usually the worst
-not being able to add size when appropriate — need to add to winners; understanding when to retrade and why — why did the trade fail, was it me or the trade?
-not taking every trade
-need to adjust orders when stale
-not touching orders when not stale
-not getting excited about trades
-not holding until appropriate exits, especially winners — disposition
-not accepting the risk. Must accept the risk.

When we fear, we fail. But we cannot be courageous without risking overconfidence because it leads to recklessness (at least I cannot). So how to not fear and not be courageous at the same time? One of the best traders I know is indifferent to any trade, yet he is excited by his job. He also has (and shoots for) only 40% winners but simultaneously is profitable on a daily basis (and expects to be). These were contraditions to me 8 months ago, now they are just fuzzy in my mind and I understand them but cannot explain them.

Sep

14

Today's base of operations brings to mind Josh Waitzkin's book The Art of Learning which espouses "the study of numbers to leave numbers". It's never happened like this before. And stocks and bonds are in moves free of the past. Needless to say, I am intensely displeased with Waitzkin's book and the moves. However, one must credit Waitzkin who is a world champion in chess and martial arts, and a world class fisheman and free diver, and apparently a lover of literature as well. With great accomplishment even if his insights rankle.

George Coyle writes:

I am reading the book now. I found the chess section to be rather interesting. Definitely elements were applicable to trading. I found it especially interesting that he spent so much time studying chess and variations. He no doubt had a natural inclination but mounds of study accompanied that innate ability. But ultimately when he ventured away from his style (at the advice of his then teachers) he didn't do so well. This reminds me of books and such that say a trading/investing style needs to suit a person's personality or it won't work…Richard Dennis said in his interviews he could publish the turtle models and people wouldn't follow it. Waitzkin's style in chess was to create so much chaos the other player would get confused and frustrated and he enjoyed the chaos, he thrived on this and used it to get to the end game (his area of focus) where most other players focused on the opening.

His discussion of deception and other tactics the Russian players used that he sometimes noticed (being kicked under the table) and other times didn't notice (tapping a piece against the table to break concentration) was also interesting.

The Tai Chi section thus far has not been as interesting. The one thing that stuck out to me is he mentioned an ability through tai chi and breathing to slow his heart rate (I assume there is more of this further in the book). I think this could be very useful in controlling emotions when trading. I was surprised there was not more quantification in the book.

Sep

12

What are the best markets to trade? Many futures markets trade differently. Some have a lot of depth and intraday gaps are infrequent (I consider these the best to trade). Others have ample liquidity but are prone to gapping. Others still are downright scary. E-minis and 10 years seem like very "safe" trading markets. Eurodollars as well. Crude oil has a lot of liquidity but can gap. Gold seems prone to fast and erratic moves. Grains seem like they can get a bit dicey. Less trafficked softs seem rather risky. Commodities in general appear to have more erratic price risk than stock index futures or financial futures. FX is fairly liquid and seems ok. I am largely making observations based on personal experience and in some case I have none so I am curious for thoughts from seasoned specs.

Bill Rafter writes:

Ask yourself, would I rather trade an extremely efficient market in which information was digested immediately and most of the fluctuations not related to new information were due to randomness, or would I prefer a market that was less so. As you gain experience you will learn that one of these mutually exclusive choices is more profitable to trade than the other. One of these requires virtually no expertise to trade, and indeed expertise would not appear to be helpful, whereas the other requires considerable expertise. One is the frequent choice of novices, whereas the other tends to be avoided by novices. Then ask yourself, how do novices typically fare?

Jeff Watson writes:

Grains are impossible right now. The 30 cent daily ranges make it too much of a gamble. Even trying to predict, or have a gut instinct of where the carry spreads, the corn/wheat/bean spread, the crush, are going….Oy Vey. To play the grains, to coin a surfing analogy: You better be in really good shape, you gotta see the wave (move) coming toward you, then paddle real hard, pop up and catch the wave. You better either be quick to bail or commit to the wave, make a bottom turn, then ride it until it's over. Determining when the ride(trade) is over isn't as simple as it sounds, and many dangers exist on and below the surface that can still mess you up when you bail the trade. The most important decision a grain trader can make right now is whether he wants to gamble a lot for a potentially big reward, or hunker down and reduce risk.

Aug

27

I really like your website dailyspeculations. There are a lot of fascinating and interesting articles that lead to new ideas and inspiration.

I read in the "About V.N & L.K" section that you trained some very successful traders and hedge fund managers. I am a student of business administration in Germany and want to work as a trader in the future.

It would be interesting to know how the training of your traders was structured and what were the most important things you focused on during the training? If you were now in my age (25 to 30 years), how would you start and where would you try to get the sufficient education for this business?

I hope that you can help me with your insights.

I wish you all the best and hope you will continue to share your insights on the markets.

Kindest regards,

Lars Gutt

Victor Niederhoffer writes:

This is a good question. Does anyone have a good answer besides reading a good statistics book like [the old] Snedecor, Horse Trading by Ben Green, Bacon's Professional Turf Betting, and starting a hypothetical trading account, and doing some hypotheses testing from a field they know something about?

Jeff Watson writes:

A big question is why you would want to trade. Trading is a pretty thankless job, very tough, and maybe you only see the media presentation, or you want to tell people at a cocktail party, "I'm a trader," but I'd like to see a why.

Having a good mentor, someone that you can apprentice to, is the most important thing in learning how to trade. A good instructor is much more important than Ivy League Degrees, how to manuals, internet chat rooms, books, systems, gurus, the financial media, and all the other mind numbing stuff out there.

My mentor when I first started was an 85 year old guy who was first trained by Art Cutten. He learned well from old man Cutten, and taught me how to keep out of trouble. The main lesson to learn in trading, more than anything else, is how to keep out of trouble. Manage to keep out of trouble, keep your own counsel, and the mistress might give you a second or third date.

George Coyle writes:

Series 3 study guide is a great (relatively brief) overview of the commodity futures industry. It touches on styles of trading as well as goes through lots of the unexciting but important details (order types, etc.). (Outline of material covered in exam [pdf]). (Online version of Study Guide by Investopedia).

From there the Market Wizard books are good to look at the different styles to see which sounds the best to you.

If quant focused I would say read something on how casino games work (odds and such–Richard Epstein's Theory of Gambling and Statistical Logic book is good) and think of how that might be applied to markets with the trader acting as the casino. Focus on keeping it simple, think of what is practical and possible when working with data.

Read your books of course. Read interviews with William Eckhardt. Larry Williams' recent book (LT Secrets for ST Trading) does a good job of outlining how quant works specifically, as does Charles Wright's Trading as a Business. Livermore's How to Trade in Stocks is a good one too (less popular than Reminiscences but more of a "how to" manual).

Deitel and Deitel C++ How to Program is the best C++ manual out there in my opinion. I dodged it for years but it is crucial and so useful. www.thenewboston.com is a great website to watch youtube vids on various languages to get your feet wet (but Deitel is necessary if you really want to learn the specifics).

And just start trading. The best teacher is experience. Even if equipped with all the great logic from above it seems real experience is necessary to actually follow the rules.

Craig Mee writes:

Understand valuation. Get a handle on all things that move a market price. Maybe have an 8 week internship of your own making with 8 different dealers. Corn farmer, art dealer, financial dealer, car dealer, importer, etc, and understand that whatever you're trading, you potentially should be able to move in theory from one to the other seamlessly. You are a valuer first and foremost, and if you value it wrong, you will also see how most of these choose to cut their positions. This might help to keep in the forefront of your mind what your mission actually is.

George Parkanyi writes:

Well if you can get past the fact that he finally went bust and blew his brains out, I found Reminiscences of a Stock Operator, about Jesse Livermore, to be quite useful. The most notable things I remember are (1) "making the most money when he was sitting, not trading" – meaning a position needs time to make really big money, and (2) to Jeff's point about staying out of trouble – averaging UP a position once its already showing a profit, and never averaging down a losing position. (The latter is especially important when trading with leverage.)

Ultimately, it still comes down to a style you are comfortable with – keeping the staying out of trouble part in mind; however you do that. And this may or may not involve the things mentioned above.

David Lilienfeld writes:

Go through some psychology texts–learn to understand human behavior and get to know one's own temperament. Understanding on an intellectual level doesn't help much if one's temperament is suited to trading. I have an old friend from high school who was on the Solomon trading in the mid-to-late 1980s. He hated it, often spent the weekends sweating his positions, etc. He moved on to be a buy side analyst, became the portfolio manager for a number of funds that succeeded pretty well under his direction and prospered. He had no trouble sleeping as a portfolio manager, and as I said, his funds did very well. A college roommate became a sell side analyst and was bored as could be doing his job. He did OK with it, but not great. He changed employers (at one point he thought about leaving the industry if he wasn't hired by someone to do something other be an analyst), started in its training program and found himself on the trading floor. He enjoyed it immensely and retired last year (I'm still not sure if he "retired" or was retired by his employer; looking at his homes, it's not as though he's wanting for much, so maybe he really did retire–but it's also not been a topic open to discussion, at least not with me). My guess is that just about everyone on this list has friends with similar stories. The bottom line: You have to know your temperament. You can learn the math, but if you don't have the fortitude, the math doesn't much matter.

The psychology part is understanding what people are about. Understanding gambling is about the mathematics of risk. Important stuff to be sure. But people matter too, and understanding what they are all about is also important.

Those are my recommendations. Lucking into a good mentor helps, but observing for a while is also one of the best teachers.

Aug

24

As an island resident we have to worry about hurricanes this time of year. Lots of interesting things about hurricanes but one of the biggest is they are pretty unpredictable looking out a few days/weeks. A look at any "spaghetti" chart will show that the current storm, Isaac, might end up in New Orleans or it might end up in Boston. A pretty wide range. Generally it is best to have some supplies on hand when living in danger zones but to avoid closing the shutters and making amends with the almighty until the storm is right on top of you.

That said, all models seem to predict fairly well in the short term. Has anyone looked into spaghetti models in predicting market movements? Thus far my simple google searches haven't turned up much in the way of the math behind the models. I know some weather predictions involve the Lorenz indicator and elements of chaos theory so perhaps that is a good starting point.

Gibbons Burke comments:

Interesting fact: Isaac in Hebrew means "he laughs" or "he will laugh". Sarah, his mother, laughed when she overheard the prophesy of the three visitors telling Abraham she would bear a child within the year, past the age of childbearing.

Russ Sears writes:

While not my expertise, I think this is best visualized as two circular motions pushing against each other, the pressures, speeds and dynamics of eventual interaction makes the path "chosen" impossible to predict exactly. Often they will "spin" in one direction or the other because a very small tipping point gets rolling and will be opportunistically reinforced.

Jul

19

Where does one learn about the economics of the farming business. I'm curious if there is a good place to read up on a sort of income statement on farming on a per acre basis (averaged across different crop types and soil grades). I'm curious to understand the economics of the business of farming.

Vince Fulco writes:

King Corn is a short and amusing documentary (found on netflix) which documents two college graduates who decide to return home to their grandparents' town in Iowa. They rent an acre of farmland and attempt to grow corn all the while profiling the inputs and costs. Needless to say with no economies of scale they make a pittance netted mostly from govt programs.

Big River was their second movie documenting the amount of pesticides which go into our food supply and the prevalence of odd cancers in farming families; striking more wives than husbands.

Scott Brooks writes:

I wrote this post back in January of 2008…..so it is very dated, but I think it will give you a good primer on the subject of growing and the economics of corn from a ground level. List member, Mike Ott is a MUCH better resource on this subject, but I think this will give you, at least, a decent idea of what's involved in growing and raising corn.

Russ Sears writes:

While not an expert on the subject, my in-law are crop farmers and my paternal Grandparents rental farmed until they passed.

Much of the individual farmer's income statement depends on the type of agreement from the land use. (Rental, share expenses and crops, debt on land, corporate owned, farming own land etc.)

But I believe Scott posted the basics with perhaps a few notes. Property taxes are a big expense for most farmers. Also profit/losses on the value of the land should be considered. Most farmers are asset rich and "cash poor". Often they take out short term loans on the seed and fertilizer. Plus they often have some leverage or debt on the land. They generally keep this to a minimum so they can withstand some shock and long term downturns. (lessons learned from 70's and 80's) Most farmers budget their living expenses They often put off purchasing equipment and new cars/pickup until a good if not great year. Darwinian nature of the business has left a pretty conservative bunch for the individuals who still farm.

They also sometimes leverage to diversify their holdings investing in stocks and bonds.

The average farm owner is generally above 65. But if not often they take second jobs or have the wife work for health benefits. As independent business health insurance can be very high. Social Security and Medicare are also part of the taxes or part of the income depending on age.

Jun

18

U.S. earnings seem to be humming along fairly well. Why is unemployment staying so high? What are thoughts on the "why" of continued high unemployment. Also, what would change that inducing hiring?

Steve Ellison writes:

Eric Falkenstein posits a correlation between bank stock declines and the unemployment rate which I find very interesting.

Gary Rogan writes:

"Confidence" (or lack thereof) is the stock answer from the right, and "corporate greed" on the left: those two are quite common these days in many documented discussions.

There is not specific reason why corporate profits have to lead to decreasing unemployment, although under normal circumstances they are positively correlated. They haven't been for a few years as the graph in this NY Times article demonstrates [link may require registration].

The key determinant of making the decision to employ someone is the answer to this question: do I need someone right now, in the geographical locale, to address current or future demand? And given that getting rid of people is expensive and unpleasant, there is a hurdle attached to the "need", and of course being able to afford the employee in the first place is another hurdle.

Corporate profits do help with macro demand and being able to afford new employees, but profits only translate into demand if employers have enough confidence to invest in new equipment/building, etc. or hire someone based on the future estimate of "need". So the lack of confidence does freeze the whole process in its tracks. High unemployment itself leads to lower macro demand on the part of the consumers due to the lack of incomes, so the only real way to break the deadlock is for the businesses to have enough confidence in the future to invest or hire. Of course the Keynesians believe in a totally different way to break the deadlock, but as I have mentioned multiple times I consider that nonsense.

High levels of unemployment compensation only slow down employment recoveries instead of doing the opposite as those on the left believe. On the macro level, they lead to mild consumer demand destruction as opposed to the supposed increased demands as they spend their transfer payments.

The geographical question is of course very big and complicated. There are a lot of alternatives to hiring locally and due to the tax-related lack of of foreign income repatriation as well as foreign political pressures, it's hard to correlate global profits with local employment anyway.

I personally believe that until Obama is out of office and the fate of the health bill is undecided (which may or may not be resolved in a few days) the employment picture will not improve. What seems like a slow-motion collapse in global demand may matter even more depending on the magnitude, but is hard to forecast. The recently documented household wealth destruction in the last few years doesn't portent a good story for local demand either.

Rocky Humbert writes:

Gentlemen:

In lieu of a titillating academic paper to share, I will reprise my typical rant: There are only two things on which ALL economists can agree: (1) Resources are limited; (2) Incentives matter. So, let's pull out the old Supply and Demand curve which derives from both (1) and (2) and repeat out loud: Ceteris paribus, if the supply exceeds the demand, the price must fall to achieve equilibrium. (A) If there is excess labor (aka unemployment,) the price of labor must decline to clear the excess from the market. or (B) The demand (hiring) must increase dramatically from the status quo. All of the political squawking focuses on the demand side. I don't hear anyone on the left OR the right talking about pay cuts as a way to clear the labor market. Maybe I should run for President on the platform that, EVERYONE should cut their wage rate by 30%. I promise you that unemployment will be below 4% before the end of my first year. Any volunteers to be my campaign manager? (It's an unpaid position — which is a first step towards reducing the unemployment rate.)

Andrei Kotlov writes:

This is a reply specifically to Rocky's [witty and entertaining] latest post (as it has little to do with the original question); an economics post to follow in a couple of hours.

(1) There are no incentives in physics; only cause and effect. Incentives imply free will. An agent's behavior *tends* to be affected by incentives—but it does not have to be. (Do not get me wrong: I do fully agree with your original "incentives matter.")

(2) The second law of thermodynamics implies increase in entropy, but I am afraid only when no agents [of free will] are involved. The latter can [and do] decrease chaos.

(The main objection to your statement "resources are limited" should have been not an objection but a modification: "agents can use [albeit limited] resources with varying efficiency." Of course, you agree with such a restatement yourself.)

(3) Perhaps most importantly, "experiments" in economics are, in principle, not replicable because (as Mises has explained) agents are capable of modifying their behavior based on the outcomes of previous "experiments."

Andre Clapp writes:

As a former physicist, I'm not sure I agree with the statement that "There are no incentives in physics". As previously pointed out, objects and systems have a natural tendency to seek potential energy minimums (a ball is "incentivized" to roll down the hill, and requires intervention to prevent it from doing so). Similarly, there is a natural tendency towards greater disorder (castles turn into piles of stones naturally, but a great deal of "intervention" is required to turn a pile of stones into a castle.)

I find the analogy to be quite good. The natural tendencies of physics can be harnessed to create rocket fuel that makes a rocket fly. The natural tendency of humans to enrich themselves and make a better life for themselves and their families can be harnessed to make a better and more productive economic system. I agree that the ball rolling down the hill has no "free will", but incentive is just a word… I'm not sure if it implies free will or not. I'm not sure it matters.

As an aside, the question of whether humans have "free will" is actively debated in the relevant community. In thinking of how to design an experiment to demonstrate the concept of "free will", I find the concept to be poorly defined, if not undefined, and therefore meaningless (to a physicist!)

A pleasure to be part of the discussion group.

Respectfully yours,

Andre Clapp (The rocket scientist)

Andrei Kotlov writes:

To Andre Clapp: one indeed needs to start with the concept of free will—but, may I hide behind the statement that it is too big of a topic for me to cover here? I have spent long time thinking on the nature of free will, and still do not know how to summarize it in a few sentences. To me, it is a combination of randomly-fired processes (e.g., discharges in the neural net) with a deterministic ability to select. Ol' good dialectical "quantitative becoming qualitative."

If one accepts the notion of free will (not as an article of faith, but scientifically) then the word incentive is only meaningful in the presence of a choice. If you want to equate 'incentive' with 'cause,' well, you have just redefined the word meaning "a thing that motivates or encourages one to do something." Once again, in physics, one speaks of cause and effect. When agents [of free will] are involved, the relation between the causes and effect may not be traceable [because of the complexity and multitude of the randomly-fired prior events in the brain over the course of each agent' life]. Thus, it makes sense to separate 'incentives' (for agents) from 'causes' for 'inevitable' effects, in particular on inanimate objects.

Andre Clapp writes:

Hi Andrei,

First point: In the world of quantum mechanics the future is not completely predictable, even for inanimate objects (particles) in the absence of agents. The world is not deterministic, it is probabilistic, a point that N. T*leb seemed to understand well when he wrote "The Black Sw@n". It is not just humans that are to some extent unpredictable. The ball rolling down the hill is (to some extent) unpredictable. Does that mean the ball has free will?

I think it is better to simply think in terms of "causes" and "effects". "Free will" to me is an article of faith or religion, not science or reason. The fact that you cannot define it, yet ask one "to accept it", points very much in that direction.

Not that theology is a bad thing, but these are questions without right or wrong answers. "How many angels can fit on the head of a pin?" Tell me what (define) an angel is, and I'd be willing to discuss it, otherwise it belongs in the realm of religious leaders, artists, and traumatized children and families. In other words, in the realm of emotion. As I'm sure you know, centuries were spent (wasted?) discussing this very question. (And no, "people with wings that come from heaven" is not a definition of angel.)

(I think) I know how you feel. This concept is so deep in our culture, like "the soul", that it is difficult to reject. We feel like something fundamental is being ripped out of us. And yet, it doesn't bear up well under scrutiny, or the light of reason. Even something as fundamental as a definition is missing! Surely that tells us something…. In the end, is it really so (emotionally) different to say that human actions are a result of cause and effect, than to say that everything happens because it is a deity's will (an idea that many people find comforting, not threatening.)

All the best,

Andre - The rocket scientist

Jun

8

I really like Atul Gawande's writing and ideas. Failure is an interesting subject that's not looked at enough. The success stories always get the spotlight, the books, the movies, but part of it is just survivorship and luck. Tragic failure comes from making a whole series of mistakes in a row, and making a minor problem in to a major one. Your judgment is not as good under pressure and mistakes lead to others. Sometime multiple small mistakes lead to death as we saw in our previous discussions on the book Deep Survival.

Older people are cautious because they have failed. Many young people have not experienced failure, partly from being protected, partly just less exposure to random bad luck. It's as good as most major ideas, accomplishments are done by the brave, often young people willing to take the risk.

George Coyle comments:

I'm reading a book called Great Failures of the Extremely Successful by Steve Young. It goes through perhaps 100 or more stories (a few pages each) about failure and how it helped various people from different walks of life. Some are great, others not so great, but the book is littered with facts (I am skeptical about some but regardless) about people who overcame failure and adversity. Whenever you have a bad day look up Abe Lincoln's road to the white house.

Larry Williams writes:

Charlie Sheen is my new hero this guy bounces back from disasters better than anyone I have ever seen how can he go through that much humiliation and still go on stage…pretty amazing or great drugs… one or the other I suppose

Jun

4

I'm reading Trading as a Business by Charlie Wright. Pretty good book profiling the evolution from discretionary trader to systematic trader. One of those books where I found myself laughing at having been down the paths. More trend following oriented but I think it is a pretty good synopsis of the systematic world and he covers some bases that added value in terms of elements to consider in one's trading (or at least mine). Decent set of checklists.

Also, Tradestation seems to do most anything a trader would want in terms of trend following testing. I have never used it though.

Thoughts?

George Parkanyi writes:

The only flaw I find with systems is that they immediately stop working as soon as you try to use them. I think people need to do more research on fading systems.

Christopher Tucker writes:

Where's the "like" button on the Speclist?

Steve Ellison adds:

Yes, even systems I developed myself stop working when I try to use them because of data mining bias. Even if there legitimately is an edge, some component of the good backtesting performance is better-than-average luck.

Leo Jia writes:

The word "enlightened discretionary" is very appealing. The reason for it, I guess, is because of the word "enlightened" more than the word "discretionary". Everyone hopes to be enlightened in someway. Being enlightened seems to be a spiritual consummation. But I guess that is not the first and real reason why people are after being enlightened. The real reason is that it is mystic and mostly unattainable. This coincides with a human nature of always craving for what they don't have, which is among the reasons why most people are persistently unhappy.

I feel preferring discretion to system is quite illogical. Aren't whatever rules one uses as a discretion by nature a system? It perhaps is not explicitly sketched out, but it by all means is a system of rules that resides in one's head. Couldn't that be phrased and then programmed? I agree some are not very easy. But are they really impossible?

Gary Phillips writes:

I've been doing this long enough to instinctively know what works and what doesn't. I only need to look at my P&L for empirical confirmation. If in doubt I just try to see the market for what it is and not what it appears to be. One needs to understand market structure, liquidity, and price action and develop a framework for analyzing the market, somewhere between bottom-up & top-down lies the sweet spot. This allows you to see the market in the proper context and provides you with a compass, which will keep you from feeling lost and will show you the way.

Craig Mee writes:

Aren't ?

Hi Leo, you probably could say "whatever rules one uses as a discretion by nature is a system", but a system may not have the ability to load up once the move kicks (obviously it can be programmed) but at times the opportunity may appear intuitive, and a trader can do that on relatively short notice, whilst keeping initial risk limited.

Interesting, Gary, the issue with systems seems to be at times data mining against price action and structure which gives strength of understanding. The HFT may work on massive turnover, low commissions and effectively front running, and unless you have those edges then it appears difficult to succeed from a data mining basis (and relatively scary trading something that you don't effectively understand from a logical point of view). However classifying a markets structure, and working off 3-4 premises no more, (as I believe more would allow any edge to be diluted across a range of options), and the ability to leverage once on a move, appears to be something you can work with. This is purely from a hands on execution basis, no doubt the pure programmers can weigh in.

I remember speaking to a guy who professionally programs for others… (admittedly a lot of retail), and we were talking about what are the laws in place for him to not front run me after developing a system I gave him…and he was like "mate, to be honest (probably insinuating "dont flatter yourself") 97% don't make a dime." That was certainly probably expected I suppose, but to hear it in technicolour was confronting and I was surprised he said as much.

Gary Phillips writes:

I really don't believe that discretionary trading today, is any harder than it used to be. The emotional aspects, and risk management, have essentially remained the same. Methodology is different, because algorithmic driven HFTrading has forced intra-day traders to change from momentum chasers to mean reversion traders. And as you stated, there are countless global/macro concerns as a result of the financial crisis and continued global easing. So, it does demand a broader universe of knowledge, and revamped techniques and benchmarks, but it still boils down to identifying what is truly driving price and how it is being driven.

I guess this is what gives you the elusive *edge*. But, as we used to say the *edge* can sometimes be the *ledge.* That being said, trading doesn't have to be about being right or wrong the market, or predicting where the market is headed in the next moment, hour, day or week. Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results.

Kim Zussman writes:

"Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results."

One would suggest that trading is a waste of time if your historical or expected mean are random.

Mar

28

Having considered the rollover for many years, I conclude the best thing is not to roll over at all.

Bruno Ombreux agrees:

You are right. But that is if you have a choice. Sometime you have hedges that need to be rolled over. And it is not a choice you make. The hedges are a consequence of your underlying business, which is where you make the money. Then the hedges and the rolls are best seen as a cost, even if sometime they turn out a profit.

Gibbons Burke writes:

An alternative to creating a single continuous contract to model the behavior of a trading regime which may holds a position across contract deliveries (as this must be tested) is to test that model's behavior using individual contract histories as you would do in real time, rolling your position at the indicated times as necessary. If you need more history for your indicators than the new contract has, then you can create a back adjusted contract anew each time with the contract inn which you have the current position reflecting the actual prices at which that contract traded, but the historical data has values from earlier contracts. This minimizes the distorting effect of cumulative rollover adjustments that you get when you make one continuous series covering the entire testing period.

Rocky Humbert writes:

There is a paradox in this discussion. As a *theoretical* matter: I can own a cash position in something for X months/years (as a speculation, hedge or investment.) Or I can buy a future that expires in X months/years. If the p&l between the two is materially different (after taking account of leverage and financing), then this is a pure arbitrage.However, the arbitrage is problematic to exploit in physical commodities because of the logistics involved in owning and storing physical commodities. But the arbitrage should be easy to exploit in things like Stocks, Bonds, Gold, currencies, etc. The arbitrage CAN arise in the course of business precisely because hedgers, investors and speculators all have different motivations. But the arbitrageur will benefit from this dichotomy if his analysis is correct. Let's not fool ourselves: The RATIONAL ECONOMIC ARGUMENT MUST BE: the futures price is the BEST indication of where the price will be in the future. Whether that future is one month or 100 months. Any other interpretation leads to a break down in core economic principles. The rolls are simply a discontinuous manifestation of this phenomenon.

George Coyle writes:

I am sure this is flawed logic and welcome analysis/criticism, but all this talk has me thinking stocks are a more ideal vehicle for true trend following (vs futures). No rolling/transaction costs, potential dividend yield. You don't get the leverage and are probably subject to reg T on stocks but that may not be a bad thing.

Gibbons Burke adds:

Another reason stocks are less susceptible to trend following strategies relative to futures markets are laws forbidding insider trading. The prohibition on a profits from privileged particulars prevents their percolation into prices until promulgated publicly. The predictable result is that when new information is released, it is immediately reflected in the price, causing a quantum move to the new value level, a trend exploitable by only the extremely nimble, or knowledgeable scofflaws.

No such prohibitions prevent futures traders from trading on inside information. The market exists mostly for the benefit of insiders. When they act on information they have, with their fingers on the pulse of the fundamentals of the commodity supply situation, and the condition of crops, etc., that telegraphs that information into the price. As the information spreads, and more traders act on it, the trend to the new value level which reflects the full discounting of that new data. So, the speed with which valuable fundamental data about commodities futures markets gets integrated into price slowly enough for a trend to form in price which is more than just noise. This creates enough beyond-noise trends which makes a trend following system able to operate and squeeze a profit out.

The for trend followers problem comes when the number of trend followers swells, and they all pile onto the signal - the systems acting on smaller noisy trends create their own noise and the increased noise increases the risk to the point where the real trends based on real changes in the supply-demand situation are not big enough to overcome the cost of catching the smaller losing noisy trends for small choppy losses.

Mar

25

I've been hearing a lot of recent JPY mentions these days. Yen seems to be taking a header. YTD post several years as a champion. What is the bear case? High Debt, Low Yields/Carry/Risk On, Zombie Banks, Relative "Value" in a crisis given preexisting low rates rolling off, poor demographics, export economy seeks a weak yen. Any major selling points I am missing? Is this move a head fake to be reversed in the next leg of the rolling brownout crises or a major trend reversal?

John Floyd responds:

There are some many possible answers to your question encompassing multiple time frames and potential driving factors. But let me try to put some of this in perspective and at least attempt to ask the right questions.

In 1985 I arrived in Japan after 23.5 hours of travel, bought some JPY at the airport at 248.55, headed to Tokyo by bus and as I put my head down on the futon there was an earthquake tremor that shook the building. The next day I read the classifieds for an English teaching job and was hired within 2 hours for a $40 an hour cash paying job. My only qualification and employment test was that I spoke English and could read the equivalent of what amounted to be a 5th grade English story book. I met many nice students ranging from businessmen in Kawasaki to the actress who later became embroiled in some sheep-poodle issues. I soon thereafter also worked for an investment company during which my first day I was informed that any lunch would have to be preordered very early and any possibility of going out to lunch would have to be done by reserving hours or days in advance. Japan was booming, money was spent with excess, and the now aging demographic spectrum was 25 plus years younger.

Since that time in 1985 the JPY has appreciated versus the U.S. dollar to 75.35, the "bubble" burst in 1989, and Japan entered what has been two lost decades of a stagnant economy. In the past several months the BOJ has adopted an inflation target of 1%, the BOP's has shown further signs of shifting course, and further intervention by the MOF/BOJ to weaken the JPY by selling it in the open market was revealed. In the longer time frame many other factors are at play such as debt levels, demographics, ownership of the JGB market, macroeconomic shifts, etc.

The message of the markets and the message I take from the recent action is Japan's new experiment bears careful watching. The shift that may be occurring in the collective forces and thoughts in Japan is potentially a very powerful catalyst juxtaposed to the macroeconomic fundamentals. The potential for the JPY to reverse much of the gains versus the U.S. Dollar from 1985 bears careful consideration and potential opportunity.

Mar

22

What is the best recipe for leverage? Is it safest to backtest models and find the worst points historically and measure leverage accordingly? So if a model would have gone down 20% at the worst point in its history unlevered I know 5x leverage would have equaled a wipe out and thus use less always mindful the system could see that point (or worse) again? Or best to factor historical probabilities using counts or scans to do so? For example if 12/14 days my model has lost and based on history there is a 2% chance of tomorrow being a loser should I then up the leverage? Conversely if I have won 12/14 in a row should I decrease leverage or is it best to let it ride when in the black upping the leverage?

On a related note in the options market, I find most models eventually reach ruin. If you buy options you run into prolonged periods of no vol and are so depleted by the time the high vol periods return your are in trouble. If you sell options unhedged you run into crash problems. Spreads (put/call) seem interesting but the most optimal points to employ them generally result in taking in 5% or less of the capital at risk and if you up the leverage you risk ruin here too. If you don't lever up you don't make much.

Employing no leverage makes for stability and lesser concern but then a reasonable AUM is necessary to generate $$ amounts that make the game worth the effort.

Leo Jia writes:

Hi George,

IMHO, I don't use the historically worst point to determine my leverage level. I consider that event not statistically robust. What I do is that, assuming I have a profitable model, on each trade, I determine the leverage level based on the risk level according to the model at the entry price and how much I am willing to lose for any single trade. To minimize the impacts of large and prolonged drawdowns, I sharply reduce my position sizes during those periods.

Feb

24

I take the view that most market predictions don't produce statistically sound results.

I believe market condition is a result of human behavior. Although many fundamental human behaviors are predictable with the advancement of behavioral sciences, the market involves more than the fundamental human behaviors. The key to it lies in the varying derivative perceptions of market participants.

Let's say the view "since condition A, then the market will rise" is the fundamental perception. A first derivative view, for instance, can be "since all believe the market rises due to condition A, it will fall". A second derivative can then be "since all believe the market falls due to (…), it will rise". And so on.

If the market participants all adhered to one of the principles above, then it would be very easy to predict the market. The thing is that is never the case. The big hands shift views along the derivatives all the time. That is what makes most predictions today unsound.

If we have a way (the big winners should have this talent) to predict which derivative view the big hands take, then the prediction would be more accurate. But then, if many could do that, the game changes again.

Before that happens, let me raise the question here on how one can develop that talent.

Steve Ellison writes:

This is the principle of ever-changing cycles, as described by Bacon in Secrets of Professional Turf Betting and elaborated on in the Chair's books.

One of Bacon's approaches was to look for good horses that had lost in their most recent races. The memories of the recent losses caused the public to have negative opinions about those horses.

George Parkanyi writes:

Market movements (which way, how far, and when) cannot be predicted by DEFINITION. The financial markets are a non-linear system. More than three non-correlated variables, and you cannot predict a specific price at a specific future point in time — a mathematical certainty.

However, like many natural cycles, markets exhibit a powerful tendency to revert to the mean. Now that mean moves around and will have its own wobble, but around it there is definitely a clear sinusoidal pattern — actually short and longer term patterns within patterns. Look at any index or commodity chart over an extended period of time. Individual securities will have the same tendency, but the longer term impact of low-probability outliers is more pronounced — your Microsofts or your Lehman Brothers'. The more narrow the influences — the greater the risk (one-trick pony, or bad management risk for example.) If you apply portfolio theory (diversification basically), the risk (and reward) of outliers is significantly diminished, and I believe you can develop successful strategies simply based on price and on the concept of reversion to the mean using indices, sectors, and commodities (anything always economically necessary to greater or lesser degree, that has an extremely low probability of going to zero. Even there it's not quite blow-up risk-free (asbestos didn't really work out.)

You can then more safely use leverage and modulate the range of returns with same. Reversion to the mean requires a large sample size, so you need many sources acting on the main influences on price (large underlying product markets, liquid financial markets), and time. The larger the sample size and the longer the time frame, the more reliable a reversion strategy should be.

The psychology of what Steve alluded above to is reflected in the aggregate behavior (influences on price) mentioned above. If you're going to go for the "bad horses" though, buy several in case one keels over and dies. Now if they all contract a contagious disease from each other…

George Coyle writes:

The 86th episode of Seinfeld was called "The Opposite" and involved George Costanza's experience in cycles.

The plot goes as follows (from wikipedia):

George returns from the beach and decides that every decision that he has ever made has been wrong, and that his life is the exact opposite of what it should be. George tells this to Jerry in Monk's Cafe, who convinces him that "if every instinct you have is wrong, then the opposite would have to be right". George then resolves to start doing the complete opposite of what he would do normally."Of course everything goes right for him from then on (until the end of the episode). While funny it brings up the interesting idea of the Costanza trade. Out sample seldom replicate in sample (probably due to ever changing cycles). How can one figure when to follow the trend of profitability and when to apply the Costanza trade to a perceived winner.

Feb

21

I downloaded SPY weekly data from 1/2000. I calculated the open to close change in percentage terms for each week. Next I used the excel function (=WEEKNUM) to find the week number. 1/3/2012 was week 1, 1/30/12 was week 5 which makes this week 7.

I looked back to 1/2000 to see what happens in various weeks (forgive my simplistic counting Rocky, fwiw fundamentally I am wary of being long here). My N was 12 for any period not yet covered in 2012. Only 4/12 week 8s were up (66% down) with an average expectation of -0.80%.

Further only 2/12 week 9s were up (83% down) with an average expectation of -1%.

Market certainly doesn't seem interested in going down and the N is pretty small but probably worth considering.

Steve Ellison writes:

To avoid the problem of multiple comparisons, I would suggest running a simulation in which you randomly reshuffle the weekly changes and sort them into 52 groups. Repeat the random reshuffle 500 or 1000 times . Then tabulate the extremes (highest and lowest number of up weeks in ANY group) for each repetition. You can then sort the extreme results from each repetition and check what the top 2.5% or top 5% of the highest of 52 groups was in the simulation. If you find actual results that exceed these cutoffs, you may be onto something.

There are probably computer programs that will run such a simulation very elegantly; I just use the Excel RAND() function and copy and paste until I have 1000 repetitions

Feb

9

When the market gets going in one direction like it has lately I usually get a bit frustrated. Not so much because I am losing (I have given up trying to pick tops and bottoms when there is anything beyond my opinion at stake) but more just because the market has such a propensity to go to extremes and it is hard to handicap extremes. Usually I swear off shorting and make general untested comments like “buying over the long haul is the only way to go” right before a big reversal.

I decided to test this phenomenon by looking at the close/open change in the SPY from 1/2000 to end of Jan 2012. I found the average result was -0.01%. Max was +8.43%, min -8.99%, st dev 1.16%. Of the 3039 days, 51.5% were up. I found this to be interesting because the distribution was fairly normal. This could all be a function of the central limit theorem (CLT) but regardless of reason, sort of renders my conclusion that it pays to only go long wrong. As an aside, it is interesting to consider the CLT as a trading device, I do not believe it can be proven wrong over enough observations and time—solvency remains the concern.

Anyway, I next examined the calendar years and found that there are biases within years. They are subtle but they exist. More evidence of the CLT causing the near zero expectation over the long haul. I drilled further (weekly/daily) and found more biases.

Looking at it this way, I would say that it pays to be both long and short, the distribution is approximately normal over the long haul and therefore there is no great bias to long vs. short. The frequency goes to the longs but the magnitude advantage of the shorts renders the longs neutralized. On shorter horizons the biases become more evident. If you can pick the sub periods correctly, you will outperform.

But stepping back, I look at it another way. If I go long every day I would be down very small. If I go short every day I would be up very small. If I go long and short my outcomes vary. If I hit every day correctly, I will drastically outperform. If I hit every day incorrectly, I will drastically underperform. Given the distribution is normal, the expected return of batting 50/50 with a long/short approach is about break even.

So while the simple math indicates I am equally benefited in being long or short, the reality is I have to be right. Therefore I believe it may make more sense to just be directionally biased. Over time the central limit theorem will bail me out. If I use counting or fundamentals or value or common sense or some combo of these I can likely find more opportune times to be in/out of my directional play, upping my chances of success with a CLT kicker. Adding a trailing stop would likely help. I could, in theory be directionally biased picking every single day wrong, but the odds of this generally seem less likely than getting chopped up being long/short. I have not quantified this however.

Thoughts?

Rocky Humbert writes:

Without commenting directly, there are two big things you didn't mention:1. Convexity. This is a fancy way of saying that, stock prices cannot go below zero. But they can rise infinitely. This may seem like a nonsense statement, but I raise it because you raised the central limit theorem. If the stock market is truly and completely random (and has no long term drift), if you play a monte carlo simulation long enough, the S&P will print at a price of 0.0000000001. It will also print at a price of X–>infinity. Hence, there is a clear mathematical benefit to being long versus being short, ceteris paribus…. because the sum of infinity and zero is a BIG positive number … 2. Cost of carry. Again, assuming that there is no drift, when the risk free rate is substantially below the dividend yield, there is a (perhaps illusory) bias to holding long positions. When the risk free rate is substantially above the dividend yield, there is a (perhaps illusory) bias to holding net short positions. And, unless you are always 100% long or 100% short, there is also the cash yield on uninvested cash. Perhaps some other specs have studied the market behavior when stocks have positive/negative carry — I haven't. However, it's generally accepted that a substantial portion of the return in stocks is attributable to dividend yield, so this should be considered. To repeat, I'm not directly responding to your question. I'm pointing out two considerations that you didn't mention.

Tim Melvin writes:

While not the worlds greatest math or stats guy I think your test period may be giving you information that becomes less true with time. The period you use has two major market crashes in less than decade giving more bias to the short side results than you might have gotten if you studied 1988 to 2000. if you believe the next twelve years will look like the last 12 in terms of market behavior and volatility then you study holds up well if it doesn't then perhaps not so much…

George Coyle responds:

Interesting point Tim and Rocky. When I graduated college (2000ish) it was a forgone conclusion you could expect the stock market to return 8% or so a year, year in and year out (well over a horizon at least). The last 10 years have proven otherwise. Ever changing cycles. Would be interesting to study the impact of generally accepted academic market conventions and what happens in reality once they become doctrine. Hard parameters to concisely define though.

Jan

20

The destruction of Nat Gas continues and at these prices I am inclined to wonder if/when "value" players might enter the fray. Nat gas has been down 7 days running examining close to close prices. From 1/2000 to 12/2011 this has happened 22 times (out of 3008 days). The odds of it going up from yday's close to the close in 5 days are 50/50 but the magnitude of the losses offset those of the gains historically. Interesting that even after so many down days that history expects continued losses in the next few, and today's price is acting accordingly. If modeling this with a stop loss, positive expectations can be found but the frequency of winners decreases significantly from the 50/50 as the stop is often triggered in the following days. Aside from being a mean reverting method vs trending, this strikes me as something the turtles might have employed based on Curtis Faith's books. A system which takes a bunch of small losses and offsets the small losses with few large gains. To the statisticians on the list, what are the detrimental impacts of pursuing such a strategy?

Mar

1

The view of the bay was breathtaking. The evening breeze caressed her skin. She shivered. "I am sure he loves me," she said, "but I'll never manage to get out of this situation. It hurts so badly."

"I cannot command winds and weather," he started. "Nelson was the greatest Admiral of all times. He meant to say that you cannot change the facts of life. You have to adapt, understand the forces at play and use them to your advantage".

He would not follow the herd. When prices plunged 50% he bought those stocks although there was no real setup. From there the market panicked, the pain seemed to be unbearable. Nevertheless he did not close the trade. It would have been a blow to his self-esteem. Then the market printed a long rebound and he recovered half of his losses. The pain became less intense. With time wounds heal and only scars remind you what happened. Even if you are still losing big money.

He explained: "I learned from markets that taking a loss does not mean there is something wrong with you. Get rid of his ghost, wait for a set up and open a new trade. It is as simple as that."

He was lying to her and to himself. They were friends, but he had always considered the possibility of a different relationship. She was beautiful; there was something intriguing about her. But he was well aware there was no future. She would not be the right person. Her unhappiness, her attitude towards life would drain his energy and he was already exhausted. He needed a dreamer; someone that would give him strength, incentives to do things and not complain or regret something that had not happened or could never happen. Nevertheless, he stuck to this relationship. The same way he stuck to his loss in the stock market. It had been pretty painful at the beginning. Now he had scars to remind the pain and he was still uncomfortable. This would never go away.

Suddenly, as if she was reading his mind, she said: "I will love him forever. Nothing will change this. I must try to forget him even if I know it will not work. I need to replace him in my mind with someone else. That someone cannot be you". He had been awaiting his turn, sitting with his legs at the edge of an abyss and helping her whenever she allowed him to do it. It was like a flash, and he realized he had to do something about it. He turned on his IPhone, accessed the trading account and introduced a sell market order at the next day's open. He had decided to get rid of his long held position and to close a losing trade in his life.

Then he said: "There is no reason for me to be in this trade, I need to get out. I want to look to the future, to the next trade". He thought he would also be a better trader from now on. She looked at the dark sea: "It is your choice. I will not ask you to change your mind. Maybe one day…" He did not let her continue. "Hope is for losers in trading as in life. He managed to say, holding back his tears: "Once a trade is closed, you don't want to look back…to feel regret…or remorse."

He left without turning back. He could imagine her on the terrace, as beautiful as ever.

There was a lady in Sorrento wearing a pink dress at a party that night…

George Coyle asks:

This is great. I thought it might be literature but for the inclusion of the iPhone. The patterns in romance and trading are so similar. Good trades are easy to get into, they go in your direction almost immediately, and they require minimal effort and are a pleasure to have on. Thinking about them makes you feel good. Bad trades inspire doubt and rationalizing, can result in sleepless nights, and usually begin with immediate loss which results in more rationalizing such that even if you are down 50% a small rally inspires unwarranted optimism (even though you are still down 45%). And one generally winds up in emotional distress and makes rash decisions exiting at inopportune times. I have drawn the parallels many times; hope and human psychology seem to be at the core.

I think this is why systematic approaches are so popular in the short-term in trading, the human element is removed. But a systematic approach to dating doesn't really work. For one, by definition if you are in fact part of the dating pool, every relationship you had up until now has failed so it seems a fool's game to even play based on odds. It becomes worse if you have an adequate enough sample size to have approximated the population via the central limit theorem! And you could be viewed as cold and calculating, two things which seldom result in romantic success. Inevitably the initial honeymoon goes awry and a rolling stop results in the end of a relationship. And the vig can be very high so it might pay to approach relationships with a long-term hold investment bent post some initial time based rolling stop out (if one wanted to use a pseudo scientific method). But being a trader, one is always aware when the trade feels bad which can lead to dismay as the patterns usually don't lie!

Craig Mee writes:

The market mistress plays with one's inner demons. On a big turnaround, you can't help but get on, though your immediately exposed to the gun slingers, but as traders know the worst of the two evils is when that baby pops to the moon, and you're not on. To commit and face certain high winds or not commit and be left in the shallows. .. mmm I hate harbour.

Feb

17

Back in 1992 I read Peter Lynch's book "Beating the Street". It's a fun book to read; he explains how he came to recommend ~20 stocks in that year's Barron's "Roundtable". As the years passed though I kept noticing that stocks that he had recommended were falling by the wayside. One of them, Sun TV and Appliance, was a retailer in Columbus, Ohio, where I was living at the time, and not too many years after the recommendation, Sun crashed and burned. Similarly I noticed bad things happening to Supercuts, which he recommended, and more recently Fannie Mae and GM both fell to zero-ish levels. So I've long suspected that overall his picks might have been sub-par, or a disaster, even.

Today I finally got had the time and energy to test it. I know this is breaking the rules, but please refer to the attached spreadsheet, only 10 kB. The spreadsheet shows Lynch's 18 stocks (I excluded one stock because it traded in London and another because it was a "Class B" share, and I couldn't figure out what ticker to use in my database) and their tickers as of 1/31/1992.

Many, actually most, of the stocks did not continue as going concerns until today; they were either acquired, bankrupted, or whatever. I believe that my database (MarketQA) does a reasonably good job of giving my a terminal value, but beyond that I didn't attempt to find out what happened to each stock.

So the spreadsheet has a column for "months as a going concern", i.e. how long the stock lasted after 1/31/1992 until it was acquired, bankrupted, or whatever. Stocks that survived until now have lived for 229 months. The next column, "$1 grew to" tells you how much money you'd have if you invested $1 and held until the firm ceased as a going concern. The last column gives the compound return over the period as a going concern.

Lynch didn't do badly at all. The average stock grew $1 into $4.24. On average the stocks "lived" for 141 months as going concerns, and I did not give Lynch any credit for reinvesting the moneys after stocks died off. However there was an enormous variation among the stocks. Five of the 18 stocks lost more than 90%, but four multiplied your money by a factor of 10 or more.

The big winners were in the thrift / S&L stocks–on average they grew $1 into more than $8, and without them the average performance of the remaining stocks is not impressive.

Lessons? I guess these results give a pretty good feel for the wide variation in returns of individual stocks over long periods. It may also be surprising that stocks have such finite lifetimes, even when they work out well–e.g. First Essex turned your $1 into $20 before it fell off the radar about ten years ago, presumably after being acquired. Lynch himself always emphasizes that the occasional "ten bagger" can make up for a lot of sins elsewhere in the portfolio, and that definitely played out with his picks.

(If you can't handle spreadsheets, here it is as text, but I have no idea whether it will format properly for you.)

Steve Ellison writes:

The median stock turned $1 into $1.70 and had a 4.4% CAGR. I got similar results when I checked stocks suggested by Jim Collins in Good to Great. A small number of big gainers made the portfolio as a whole above average. Maybe there is a lesson here.

Tim Melvin comments:

If you study Mr. Lynch's results much of his success was a result of playing the mutual thrift conversion game. His fund had deposts in just about every mutual thrift in the country so he could buy the conversion offering. Almost universally these stocks were HUGE winners. That game is very much back to life today as new regs are pretty much forcing many thrifts to convert…..most can be bought after the offering at a still sizable disocunt to tangible book value.

Charles Pennington writes:

Of the four "ten baggers", two would have gotten stopped out at very disadvantageous (roughly break even) prices…

I would have guessed that those conversions had limits on how much stock a customer could buy, and with those limits in place, how could they make a dent in the performance of a large fund?

According to the Cramer book ("Confessions.."), which is very entertaining, much of the good performance of his fund was also due to holding thrifts, but he almost went under when redemptions threatened to force him to sell those very illiquid stocks.

Apart from the initial "pop" after a conversion, I don't see why thrift stocks would continue being cheap. Isn't this a very well-known idea, given that I've heard of it?

Victor Niederhoffer writes:

Now the professor is going to compute the market value of the individual stocks and tell me that the average market value of the ones that went down 100% at inception was not different from the average market value of the ones that were 10 baggers and kept him from reading books.

Charles Pennington responds:

The Chair's point is that most of the 10 baggers mostly started out as impossibly-small-to-buy stocks, and that is correct. Here are the 10-baggers and their market caps in January 1992:

George Coyle writes:

Food for thought since I don't have access to data, certain funds and firms have size restrictions on what they can buy due to position sizing, liquidity, etc. It would be interesting to see if stocks which crossed over a given level in market cap ($100mm, $500mm, $1bb) subsequently saw inflows or outflows by virtue of qualifying as new investments for bigger buyers or being kicked out by virtue of falling below an acceptable cap level. Also, there are legal filing consequences of holding positions over certain sizes so I imagine patterns exist which are very real as firms alter position sizing to avoid regulatory filings (and ultimately position size disclosure on a non-quarterly basis). It is a bit of a momentum study meets the analysis below but with a legal/fund guideline slant. I believe Factset tracks historical cap sizes with some reasonable degree of accuracy/frequency but I no longer have access.

Phil McDonnell writes:

To throw a few stats on the table I am posting links to some work done by Eric Crittenden. He is a momentum quant with BlackStar Funds. He argues that trend following must work because long term stock distributions have very fat tails. He also argues that the negative fat tail implies that stop losses must work. One of the charts shows a huge right tail of three baggers or better. Another shows that all gains come from 20% of the stocks.

I have had the chance to review several of his studies in progress and Crittenden seems to do it right. He uses total returns and avoids obvious pitfalls like survivor bias etc.

Charles Pennington responds:

It seems kind of silly that they take this indirect route — "lots of big gainers and lots of big losers, therefore use stop losses". Why don't they just test the performance of some simple stop-loss rule? Jason proposed a trailing stop of 50%. That sounds ok to me. Then, whenever you're stopped out, use the proceeds to buy an equal weight (cap weighted) of the remaining stocks. Does that outperform or under-perform the equal-weight (or cap weighted) index?

Feb

16

Several of you began with relatively small sums of capital and made fortunes, got published, became your own boss, etc. (or so it seems based on posts here and material on the internet). This doesn't seem to happen as much anymore. Most Horatio Alger style stories these days begin with well established offshoots of big firms and too often end in handcuffs. I can't think of any instances of people started with a $5k credit card advance or loan and a dream in the past twenty years (except non-market stories like Facebook which is probably why compu sci is becoming so popular again).

Even those with multi-year consistently profitable track records with good alphas are having difficulties raising any reasonable sums of AUM. And turning $50k into $1mm let alone $20mm seems to require incredible risk or a time machine. Most biographies of successful people that I have read (whatever the field) tell stories of men and women who lay everything on the line and suffer any obstacle (lost spouses, prolonged poverty, living in a taxi while subsisting on ramen, etc.) to achieve their dream. Perhaps this is still the formula. But it seems the odds are stacked up against the would-be market entrepreneur more now than in the past with the current environment and many of the great success stories came in a period of unprecedented market rise. So, to those on the list who have achieved the improbable what would you recommend to your children or other interested parties regarding how to become a success in the markets these days while remaining personally solvent and without taking undo risk when in an era where raising external money is difficult with a good track record and impossible without one?

Charles Pennington comments:

Gladwell writes a lot of wrongs, but I think he has a point in this article . He says that often entrepreneurs have images as swashbuckling risk-takers, but in reality, at the time when they made their crucial decision(s), the circumstances were such that the decision was not all that risky.

Vince Fulco writes:

The authors (really Andrew) of the book I mentioned a few weeks back; "Panic" by Andrew Redleaf and Richard Vigilante, go in depth to the point Prof. Pennington is making. They point to the backgrounds of real entrepreneurs who seemed like risk takers but in point of fact often had years of experience before venturing out on their own.

Location 837-838 on kindle:

"…In the real economy we see all the time people being paid for hard work, for perseverance, for insight, and for experience. But it is all but impossible to observe anyone being paid for risk. It is easiest to see this starting with some extreme cases. There are many heros among the great entrepreneurs. It is almost impossible to think of one who got paid for taking risk. The more brilliant the entrepreneur and grand his achievements, the less true it seems. Was Alexander Graham Bell paid for the risk he might not invent the telephone? Nonsense, he was paid for inventing it. Was Edison paid for the risk that he might not invent a light bulb, or for actually inventing it? Henry Ford was not paid for taking the risk that he might not be able to build a car affordable to "any man of good salary"; he was paid for actually doing it. In the extreme case, even insurance companies, as the great Frank Knight pointed out almost a century ago, are paid not for accepting risks but for transforming genuine uncertainty–will I be in an accident?–into statistical predictability–some percentage of drivers will be. Even the flying Wallendas were paid not for their risks but for their skill. Dead acrobats don't get a piece of the gate. Acrobats who risk and fail are less popular than those who succeed despite undertaking greater and greater challenges…"

"…the deeper we look into these men's lives, the more difficult it is to justify the notion that 'risk taking' explains their achievements and rewards. The very notion of risk disappears into incoherence. What are the risks of not inventing a telephone (or a light bulb or an automobile)? Do we mean the odds against doing so? The odds against whom doing so? Anyone or the men who actually succeeded? If the odds against success are the measure of risk and hence reward, why were these men, who were good candidates to achieve these things and thus took less risk, so well rewarded?…"

"…Or by risk do we mean what the entrepreneur had to lose? But the more dramatic the story, the more we see that in their most productive years these men had very little to lose and enjoyed what they were doing far more than most men enjoy their own work. It is at least as true to say that they were 'at play' as to say they were 'at risk'…"

Jan-Petter Janssen writes:

I won't call myself successful yet, but I do know a recipe for success in today's world.

1) Work and save money in a high income country.

2) Relocate to a low cost, tax free country.

1->2) Exponential growth for the savvy speculator.

The mining sector in Western Australia pays extremely well (you should be able to make $100-$200k). Since there are not many temptations in the Aussie outback (except playing the didgeridoo), you will see your bank account grow in tandem with your salary. After a few years you can take your money and move to one of the low cost, low tax countries in South East Asia.

Join me, Coyle!

Feb

16

Can anyone comment on how Python compares to R as it pertains to trading testing/analysis? I already know R and am not seeing a lot of added benefit to learning Python vs becoming more proficient in R but I am probably missing something.

Phil McDonnell writes:

You could probably do almost anything you need in R. So adding Python not much of an improvement. I would say that the two languages are very different in how you approach a problem. R is much more oriented to telling it to operate on a vector of numbers or a times series or matrix object. You can do those types of operations very easily and efficiently with only a line or two of code. but if you try to write your own FOR loop to write up a procedure to do the same thing it will run shockingly slowly– something like 30 times slower. But usually there is a way to write the code up as a vector operation without a loop.

Python is more designed to be a procedural language where you write your own loops and procedures. It is designed to be efficient at that and gives you more low level control but at the cost of more lines of code and more detail from the programmer..

Jan

25

The more I learn and the more I experience the vicissitudes of life, (and the more aware of my ignorance I become), I think more and more that the wisdom of musicals, especially those of Hammerstein and Ira Gershwin, is especially poignant and sagacious.

Whenever I give advice, I find myself going back to things that I learned from my favorite musicals. I recently told a damsel in distress (one of my card's imperatives besides creating value, destroying ballyhoo, and fomenting revolutions) to listen to "September Song" by Kurt Weil and "Diamonds are a Girl's Best Friend".

I have to expand this thread to market wisdom but don't have the knack that the collab or my brother has in this regard. I believe because the musical word is so much slower than reading, and the scenes have to be so focused and riveting, and they have to appeal to the common American thread that the successful musicals are forced to get to the common nitty gritty that keeps one's feet on ground.

Alex Castaldo writes:

To be in Chair's trading room in August with the temperature 97 F and the musical Carousel playing for the 100th time is indeed a learning experience.

George Coyle writes:

Well put, Doc. I had to walk outside into the cold for a second just reading that.

I wasn't a big fan of musicals until I heard them all several hundred times last summer, then they kinda stuck. I find the interesting thing to be that human psychology never seems to change as the messages inherent in the various musicals of the 40s-70s are the same things you hear today adjusted for the times.

The market takeaways to me are:

1. Patterns exist in musicals and markets, find them and potentially reap the benefits

2. Human psychology hasn't changed as evidenced by many of the themes in musicals still being applicable today. In as much as collective human psychology governs markets, markets probably haven't changed much either.

3. Sometimes a 3 minutes song can outdo a thousand page novel at describing some phenomenon…at times keeping it simple beats a lengthy analysis.

Ralph Di Fiore writes:

I totally agree with you Victor. My all time favorite musical is the Fantasticks having watched it in Manhattan. Several of the songs from the Fantasticks have wisdom in them that would have saved immeasurable grief in the lives of some families I know (not my own thankfully) had they heeded the wisdom of this musical. One song from the Fantasticks screams out at me when I think of an older gentleman who botched up his family life and has an estranged son but this individual loves spending time in his garden. The closing line from the song Plant a Radish:

So
Plant a cabbage.
Get a cabbage.
Not a sauerkraut!
That’s why I love vegetables.
You know what you’re about!

Life is merry
If it’s very
Vegetarian.
A man who plants a garden
Is a very happy man!

A vegitari-
Very merry
Vegetarian!

Another family had a daughter that brought home a young man and asked her pa what he thought. He hated him so guess who got married… Here is the line from the song entitled Never Say No. Again from the Fantasticks:

Your daughter brings a young man in,

Says ‘Do you like him, Pa?’
Just say that he’s a fool and then:
You’ve got a son-in-law!
You’ve got a son-in-law!

Keep up the great posts, Victor.

Jan

13

From the front lines as a soon to graduate grad student in the market for employment in the finance sector, the US can't hold a candle to China/Asia in terms of jobs and opportunity. The US has effectively become a place where a "trade" wins out over a degree. There are very specific skills and requirements to get in the door these days in America. Quants want C++ programmers and data scrubbers, fundamentalists want financial statement analyzers and channel checkers, macros want Econ PhDs who chaired a University Econ program or spent half a life with the IMF/Worldbank/Fed (I guess this one isn't so much a "trade"), sales teams want cold callers and entertainers who also understand the business. Once one enters one of these "silos" good luck moving to another unless you possess a multitude of different degrees, skills, and designations (Compu Sci, Econ, Stats, Math, Finance, MBA, Engineering, Hard Science PhD, 2 yrs Inv Banking, CFA, C++, MatLab, VB, CMT, etc.). And not many opportunities exist which don't fit into one of these categories.

The Asian markets on the other hand are so illiquid on a relative basis and so many rules apply that they generally want smart people who can figure out cross country nuances and a trader serves almost as an international lawyer figuring where to trade, how to trade, and how to settle (while learning a lot of markets and likely seeing vast opportunities). On top of this, the Asian trading desks are expanding headcount at a much higher rate. One desk, which will remain unnamed to protect the innocent, is hiring over 10 new people in their group alone in the next two years. I have not heard of a single US desk with a similar hiring plan. If anything I hear of jobs being cut in the USA and openings result from people leaving (one out, one in). Moreover, these jobs in Asia are very diverse. A person on a desk in Asia will get to deal with virtually all product types (equities, credit, FX, commodities, IPOs, etc.) and a ton of different countries. In the US it tends to be segmented by type further siloing (not sure this is a word) the silos (i.e. fundamental equity or macro FX). From what I am told the majority of job takers in Asia wind up with their choice of options (buyside/sellside, US/abroad, credit/macro/equity, etc.) after 9 to 12 months or they get promoted internally. If you pick up some Mandarin or Cantonese along the way, forget it you will be an eagle with razor talons competing for prey in a world where everyone else can't fly and is blind. A year in America in a silo within a silo will probably mean a relatively small bonus and the chance to keep climbing the ladder in your specific subsilo. So choose your silo wisely, to the extent you have a choice, as your first decision may be your last.

The American dream seems to now be manifesting itself in Asia. It is unfortunate that in order to have the best available options down the road in finance one will likely have to leave friends and family and venture to Asia. Unless said person chooses to be a "trade" professional or gets very lucky.

Yishen Kuik writes:

For decades, investment banking in Asia ex-Japan used to be a hire and fire business because of a very lumpy deal flow. China, and it's large growing capitalistic economy is a fundamental game changer.

However, the need to speak Mandarin fluently will become essential. There are few people at the top today who have the relationships, the experience and the language skills, hence the opening for Americans and Europeans to occupy the top spots. All junior people however, have the language skills, and in time they will acquire the experience and relationships. Within 8 years, all the associates working on Chinese deals today will be Managing Directors, and they will have the entire package.

40 years ago it was possible for a Frenchman to be the pre-eminent American investment banker. Today that notion is highly unlikely. Affinity is where the edge is.

Cantonese is not the language of business and has little value in the financial world even in Hong Kong. The people of Hong Kong, whose manufacturing was hollowed out by China long before Americans heard of the word outsourcing, are now undergoing the additional indignity of being culturally and linguistically hollowed out.

Jan

13

I don't have kids, but this article on "Why Chinese Mothers Are Superior" seems to relate to some of what has gone around before about raising kids and Asian children generally being ahead of the curve vs their Western counterparts.

Nigel Davies comments:

The Chinese authoress, Ching-ning Chu, described this tradition as '5,000 years of child abuse.

Steve Ellison writes:

Since the reaction to this article so far seems 100% negative, I will put in a good word for it. My (Korean immigrant) wife and I had a similar parenting philosophy, although not as extreme. Most American parents demand far too little of their children. I appreciate the author making the point that parents have a right to demand high standards and achievement.

My son attends a school for highly gifted students. Even among this population, some parents complain there is too much homework. By contrast, we hosted an exchange student from Korea in our home. This student while in Korea had gone to school as required from 8:00 am to 3:00 pm every day and then attended another school until 11:00 pm every night to get ahead in academics. This regimen is typical for children of families of means in Korea.

The author of the Journal article came to the US not from the People's Republic or a Chinese-majority jurisdiction, but from the Philippines, where there is a small Chinese minority that is far wealthier than the general population and is hated for it. The author's aunt was murdered by a mob during ethnic violence. The approach outlined in the article was probably necessary to survive in the Philippines.

Nigel Davies writes:

I see your point Steve, but to me the whole thing looked like an ill-tempered rant because the lady concerned attracted disapproval at the party she went to.

As a chess teacher I've taught youngsters from many different cultures. The ones I turn down flat are the pushy ones who have decided their kid will be a champion. The reason I refuse is simple - I've seen these kids burn themselves out as they try to perform well enough to be loved. On the other hand there are kids that genuinely developing excellence with full parental encouragement and support.

These two approaches may seem very similar but they're most definitely not; one comes with conditional love. And I think that it may be more valid to try and correlate the article's recommended approach with the kind of political regime that exists in China; brutality fosters brutes.

Laurel Kenner writes:

I am reading Battle Hymn of the Tiger Mother, the book excerpted in the WSJ article for which Mr. Coyle kindly posted a link. Aubrey is taking Mandarin from a disciplinarian Chinese native, and I said I'd be interested in her opinion. Her reaction to the article: She was furious. She had grown up under just such a mother, and it wasn't a happy memory. Her mother would say, "I would rather have given birth to a piece of roast pork than you" to shame her, and the recollection still stung, years later. We may admire the Chinese kids for their "A" report cards, but they in turn envy the American ability to think "out of the box," innovate and found big enterprises.

I like Ms. Chua's style, and the book certainly is thought-provoking. I agree that the best way to self-esteem is to master a skill.

However, the short biography she provides in the book provides an unwitting clue as to the drawbacks of the Chinese approach. At Harvard, she was unable to ask questions in class, as her instinct was to simply take notes on everything the professor said. When it came time for a job interview for a Yale professorship, she found herself tongue-tied and wasn't hired. (She did get the job seven years later, after writing a cutting-edge book on how ethnic conflicts doom democratic majority rule in the Third World.)

Charles Pennington writes:

This is a fascinating and valuable book, which I've halfway completed. It is a defense of her unfashionable parenting philosophy, and she is not afraid to describe how it works in real life, complete with many anecdotes that make herself look bad. I think adults end up appreciating the special efforts that their parents made to impart on them a special skill. Maybe by now even Andre Agassi can appreciate his father's unrelenting efforts to turn him into a great tennis player.

I value the book because it gives me a realistic picture of the trying times that my wife and I can expect when we harness and over-ride our children's impulses and push them in a better direction.

The article has generated thousands of written comments, many of them harshly negative, even vicious. Ms. Chua gets some extra points in my book for boldness and bravery.

Russ Sears writes:

Beyond talent, it take a combination of the three c's of developing and spotting genius are commitment, confidence and creativity. The trick is that non of these can be crammed down a child but nurtured and grown. Further, children will react differently to anyone method so the instructor/coach must tailor the methods to the child. Last, but also perhaps most importantly, each discipline, talent or endeavor each requires a different combination of these c's and a highly expert opinion of how when and where to apply them, in order to obtain greatness.

For example a high bar, can create drive in one kid, perfectionism in another and burnout (as Nigel suggest) and pattern of quitting in others. As the Chinese example shows simply demanding commitment leaves even the obedient fearful lacking in confidence and reliant on the instructor to guide them stifling creativity. Teaching a child to love a sport, hence commitment is a necessary groundwork, and a parent/ coaches first job, but not sufficient. The idea that you can out work everyone is a fatal flaw to many scholars athletes and business men. The greats are all highly committed and their love and understanding will always out perform those that simply are counting on toughness and commitment.

Confidence, however, is only in moderation or it become hubris. It too must be developed and work. Testosterone can give a nature edge. Steroid abuse on the other hand may give a physical edge, but also tends to develop overconfidence superman syndrome. This is why I believe most of the athletes that get caught started taking them after they already developed some level of greatness. However, if you are to thrive in times of great stress rather than choke you must have confidence. Enough confidence that you do not over think the process or the exam, but enough practice, talent and knowledge than your instincts are spot on. The opposite of confidence is of course anxiety or unnecessary fear. 1 in 8 American suffer from an anxiety disorders. This therefore would be a good place to start in understanding how behavioral psychology effects investors.

Creativity by itself generally need disciple of commitment and confidence to be applied right. When to make the exception to the rule? When to trust yourself rather than the authorities? What is the right question to ask? Answer these creative questions correctly and you are on your way to greatness. Creativity however, often is either completely ignored in recognizing genius. Or it is often thought to be the only thing that matters. Both views kill the budding geniuses.

Jeff Watson writes:

Reading all of this parental preparation makes me feel like I dropped the ball as a parent as I did very little except to minimize hangups, teach my son right from wrong and allow him to be the happiest kid I know with a million friends and several beautiful girlfriends.. His mother was instrumental in making him into a scholar and she didn't have to work at it very hard at guiding his inquisitive nature as there was genetically coded DNA ensuring his "Knack" for the classics. There was an expectation that he would always learn, do well, think critically, and we were not done with force, coercion,punishment, or any other psychological devices. I was there to teach him to be a man, to do sports, surfing, skimming, and skating, shooting, archery, golfing,, bandage his knees and elbows and tape up knees and shoulders. I was also his biggest cheerleader, proofreader, outline fixer, and science teacher, who also taught him to cook and bake like a chef and prepare BBQ like a Black Southerner from Memphis.. My son might not have Mandarin under his belt, but he has Latin, Greek, Spanish, French, Italian pretty well down, both conversational and written. The jury is still out as his grad school is looming and we don't know what will be his choice. I offered him a year off after school just to hang out and surf before he either resumes his career or schooling. I wish someone had given me a year long surf break at his age as I think I would have done better in all my business because I wouldn't have been uptight for a couple of years. Of course, the theories of Galton correspond with my family and the previous generations , and I expect them to continue into the future. Hopefully, the children of the list members can also improve their progeny by marrying well, creating the right circumstances, and not pushing the kids into overload as there's a delicate balance. Just being members of the list is indicative that your kids won't be hanging out in pool halls, OTB, Illegal Pokers and numbers games, and that's a very brilliant head start that 70% of the fellow New Yorker kids can't get.

Yishen Kuik writes:

Perhaps one notion that might be useful is the "casualty" rate.

When we say such-and-such a profession is a "rock star" business, we usually mean that the number of winners in that industry are few, most of the rest are struggling, and the winners take a massively disproportionate amount of the prizes in that industry. The "casualty" rate is very high. Being a musician or an artist is a rock star business, being a doctor is not.

In Singapore, parents push their kids and will go to great lengths to sacrifice for their education. In general, we are a law abiding, conscientious, well educated and pragmatic people. However we are not known for thinking big, taking risks or innovation. And while most Singaporeans are close to their extended families, dining with them once a week, it is unusual that parents enjoy close friendships with their children. The relationship is largely characterized by respect and filial piety.

Because of this system of strong family networks, strong interest in pushing children and demanding academics, not many Singaporeans fall through the cracks
- we are a low casualty rate society. Not very good at producing rock stars, but quite good at not producing bums. This is great for kids who need the discipline and guidance and would otherwise grow up to be bums, but one could argue limits the potential of those who could have been great.

This has worked well for our small country - a stable system and a non-striking, non-unionized, trouble free and educated labour force has proven to be a winning formula as a service providing small nation that supports business between larger nations. But clearly this is not a formula for a large industrialized country, which needs to depend on the innovation of the few to create sufficient large scale value. Perhaps a system that sacrifices the many in order to locate and promote the elite few is the natural solution for an innovation driven large economy? I do not know what the answer is.

Nonetheless, Singapore is a very young country and has only been wealthy since 1980. I would expect attitudes between parents and kids to shift in the next generation.

Alston Mabry comments:

Very nicely articulated, Yishen.

An interesting thread overall.

I heard the author of the book in question speak briefly on NKR today and heard that the subtitle of the book is:

This is a story about a mother, two daughters, and two dogs. This was
*supposed* to be a story of how Chinese parents are better at raising kids than Western ones. But instead, it's about a bitter clash of cultures, a fleeting taste of glory, and how I was humbled by a thirteen-year-old.

Jeff Watson adds:

I don't know, all these people drag out scientific ways to raise kids to be smart, to be champions. They push the kids pretty hard , aiming for Harvard, Yale, etc and one might expect some blow-back from that harsh regimen.. Fact is that parenting isn't an exact science and if you raise a responsible, happy, free from baggage, healthy, well spoken kid, you have 80% of the battle won.(I don't know what studies show but would suspect that well adjusted, happy kids probably do better in college than their non-adjusted peers) The schools previously mentioned like a story for admissions, and not the same story and school path and activities to get there that the great washed multitudes present them. So many in this world are competing through their children and I suspect that the outcome in this type of contest will not bode well for either child or parent especially if the child doesn't get into the first couple of choices..

Sometimes, a kid just needs to take an afternoon off, lie on his back and look up at the clouds and just imagine. Does a world of good in so many ways. If a kid is meant for an IVY school, he will get into an IVY school as there's always more than one way to skin a cat.

Jim Sogi opines:

Many modern children are horribly spoiled. It doesn't do them any good in the future. Their parent's are afraid of harming their delicate psyche's and end up with spoiled monsters that no one likes. You don't have to lay weird trips on them either, mostly that has to do with withholding love, or disapproval both of which create their own sick repercussions. A simple well defined set of expectations and rewards and time out or denial of reward is enough. Love must be unconditional. I see parents doing the absolutely wrong thing all the time, rewarding bad behavior and ignoring the good.

David Hillman writes:

I don't have children either, but I'm not certain having children is a prerequisite for recognizing common sense and good parenting. Is it that difficult to distinguish the difference between yelling at a child who's about to put his/her hand to a hot stove and yelling at a child skipping up the aisle at Walmart harming no one, i.e., just being a child? Or, what about a swat on the backside when a kid is being particularly rowdy and inattentive to commands to stop versus a backhand across the face to "put the fear of God in him/her"?

It was my great fortune to be born to parents who loved unconditionally and nurtured, yet they employed measured discipline and never spoiled. They told us "you can be anything you want to be and do anything you want to do if you apply yourself". The sky was the limit and we believed them. The only thing they absolutely insisted upon other than a "yes, ma'am" and a "no, sir", was that we were going to college come hell or high water, but what we did with our lives beyond that was our choice and they provided appropriate guidance. They led by example, not by threat of punishment and in the end produced a couple of reasonably well-balanced and self-satisfied [term used rather than 'successful' as the definition may vary from one to another] offspring.

Still, to this day, they occasionally lament their parental failings ["in retrospect, we should have…", "if we had it to do over again,……"]. While I, too, recognize some of their missteps privately, I tell them no instruction manual pops out of the womb with a kid, they were great parents, did the best anyone could, which was better than most, and I believe that to be true.

This discussion of parenting methods brings to mind a couple of items from long ago that provide contrast.

One, the clarinet lessons of my youth. Sister Mary Rasputin, a wizened, 4' tall 80 pounder taught me to play using the 'threat of physical abuse and eternal damnation' method. Her metronome was a 15" wooden ruler slapped rhythmically in the palm of her hand. She 'coaxed' exercises and pieces from my ebony Schmoeller & Mueller Bb licorice stick with red-faced, narrow-eyed, bared-tooth, shrill, 100db, spittle-laden complaints, insults, beratings, accusations and threats. Instead of motivating, however, I found intimidation worked quite the opposite with me. No matter how prepared, I dreaded the weekly 'lessons', hated the practice assignments and fell out of love with the clarinet. Eighth grade graduation, still a few years off, couldn't come soon enough. Yet, as it came and went, this instruction appeared fruitful as I wound up with 1st place medals from statewide competitions and was seated 2nd chair in the high school orchestra. But, I learned by intimidation and rote, didn't learn much about music theory until decades later, played mechanically, not with passion, and can't help but think I'd have been better off sitting in my room studying my Rubank Elementary Method and mimicking my Acker Bilk records.

Fast forward to interaction between two former mutual acquaintances. One was a very assertive sort who grew up in a middle-class family with a 'tough love' father, the other grew up in a somewhat disadvantaged but reasonably loving family. The former had had some business success, but even his own brother once told me "He's a great guy to be around, but I'd never do business with him." The latter had not made his mark at that point. He was ambitious, but more or less muddled through life looking for the 'big hit'. The former had material goods and proudly showed them off. The latter judged his own self-worth by comparing what luxuries he didn't have with what others had. The former often publically berated and ridiculed the latter in an effort to motivate him. The latter did not respond well. All the berating did was help him feel worse about himself than he did and perform poorly.

For one who is not a parent, it is still comforting and often poignant, and it gives me hope for future generations, when I see parents stopping in the grocery to quietly instruct a child on proper etiquette or behavior rather than employing a 'terrible swift sword' approach to discipline. And, I will frequently approach that parent and complement him/her on the obvious parenting skill. The reaction is always positive. I can't help but think that kid is going to be of more use to society than will one who's had good behavior pounded into them.

Yes, fear can be a strong motivator. We all know that and there are plenty of clear examples of success and heroics motivated by fear. In my own case, tho', I went to college and have done well because of it, but I haven't played my clarinet in years. A persistent nurturing and explanations of 'why' seems to have won out over terror in the long term. That was what worked for me, not a good skull cracking.

The point is there are many methods of parenting and of motivating and of instructing. I've had some parents say to me, "Sometimes you just have to say 'Because I'm the mom!', and I suppose that is so. I suppose also some kids need a 2×4 upside the head to get their attention. But not all methods work for all people. The trick seems to be knowing one's child or student [or employee or patient or spouse or recruit or client or you name it] and trying to recognize and employ the method or combination of methods that will be most fruitful. Not the easiest task and the stakes are often extremely high, especially in the case of child-rearing.

I always thought I'd have been a good parent. Maybe, maybe not. It didn't work out that way. I was either too selfish or not courageous enough to pull the trigger. But, I've compensated by becoming every kid's favorite uncle. And, since I've learned through observation the best kids are like the best dogs and like friends with boats…..you get to enjoy them, but they go home with someone else who has to maintain them, being the favorite uncle works for me.

Yet, I have great respect for those of you who have chosen to repopulate this planet with your 2.1 kids and thank those of you who take the time to know your kids and raise them well and give them the tools they need to help them grow into decent human beings. 'Cause what they become, how they behave, and what they do, will in some way impact me and all of us in some way, and that kinda makes them my kids, too.

George Zachar writes:

No amount of common sense, good intentions, or book research, prepares one for parenting.

Jim Sogi comments:

David's advice to patiently explain in detail the expected behavior is the proper method of parenting. The common wrong method is to say, "No, don't do that." It gives the child no clue as to the proper behavior. Set expectations in writing. For example: Wash dishes once per week, or no allowance. This is clear, since the consequence is obvious. The wrong way is to say, "You're lazy and no good, and I will withhold my love if you don't help around the house more." It is too vague, and the repercussions are not commensurate with the behavior. Yet it is the common tactic I see over and over.

Dec

30

The Chair offers a meal in the ideas of forgetting and trying to start fresh in trading every day, week, month. In my case I tend to remember and overweight the large losses and not the average gains. This leads to trading too infrequently and then being subject to adverse selection. Sometimes forgetting is a good thing. This past year it would be hard to forget the intra hour move of 10% in May, or intra month move of 25% in Oct 2008. Though they deserve some consideration, their likelihood of occurring again is probably overweighted for me. I am reading a book called Waves where it documents a 1700 foot wave that hit Lituya Bay Alaska in 1958. How many fishermen would ever venture out if they dwelled on the past too much? I have found in tennis, I often play better after a period of not playing, as I forget my bad habits. For some reason I manage to remember the core fundamentals. This affect unfortunately wears off when the dreaded reversion to the mean takes hold.

Ralph Vince comments:

Interesting observation Duncan. I am of a similar mindset, have been working with the idea the past 12 months and have drawn the conclusion therefrom that "expectation," the probability-weighted sum of possible outcomes, aka "Mathematical Expectation," of what might happen, is not only NOT how human beings asses risk-opportunities, and rightly so. If we did, the analogy I like to use is, we would never board a flight.

But we DO board a flight, knowing there is an incredibly small probability of never arriving at our destination. Why? Because we "expect" to arrive at our destination.

In fact, the notion of Mathematical expectation is really a mere proxy (and a poor one at that) for assessing risk-opportunities compared to what we should use.

Thinking about writing a book on this. The problem is it ties into everything else I have ever worked on, and a lot of it would be redundant.

George Coyle writes:

I too suffer from this problem. This is obviously tough for those trading with casino logic which requires the "house" to play all games (subject to size limits). There is a concept in psychology known as systematic desensitization (http://en.wikipedia.org/wiki/Systematic_desensitization) which attempts to stop responses to fear and anxiety. It might be useful for trading, but presumably one would have to incur many losses to get the benefit. Also, if we check the opposite end of the spectrum (the bank traders who take large risk because they can just jump ship and move to the firm across the street if they lose) it would appear having nothing to lose personally, and thus an asymmetric risk profile, would also result in eventual disaster. So there must be some optimal level of fear/greed/caring/indifference, the efficient frontier of trading emotions. It is difficult to think of how it might be measured and then used.

Craig Mee comments:

This seems to be a catch twenty two here, how individuals receive risk, and how the market does.. As everyone is boarding different flights at different times, surely fear and greed , or lack of …fifo's each other out.

Ralph Vince adds:

Put another way, what the casino "expects," and what you, the solitary individual "expects," are not mirror images of each other.

George Coyle adds:

The casino expects a slight positive expected return over the course of time (by virtue of the odds of the games). The only real exception is blackjack in which a player has an edge provided s/he can split aces and double down on split aces. The speculator using a casino approach would expect the same. Basically the central limit theorem says that over a large enough sample the distribution of outcomes will be approximately normal. In this instance both speculators and casinos using this logic assume a slightly positive mean (expectation) to the distribution. So they do expect the same, a profit over time by virtue of the laws above. The amount of said profit varies as markets are not governed by the statistical laws of casino games. So they aren't mirrored, but they have the same trajectory. Both experience runs against the expectation, the goal is to manage emotions such that a big loss does not prevent a speculator from playing the next game which may cause the positive average to be realized. The casino does have the benefit of odds remaining in their favor over infinite time.

Dec

27

Most books and movies have a indirect way of indicating that their talent and authors are fellow travelers. The common thing is to have the radio or tv on showing some stereotyped situation where the rich are living in mansions while the homeless are on the street, or a Republican President like Regan or Bush or Nixon saying something that looks evil and cold-hearted when taken out of context. A new technique would be "Fox News would have us believe that"…."tenure gives university professors the green light to teach that revolutionary overthrow of the capitalist system is appropriate." What are some of the other techniques? How does financial news color the news to make us do and think the wrong things?

Scott Brooks writes:

It doesn't matter what you say, it can be edited to be anything that the "opposition" (whoever they may be) needs it to be. Witness Alan Grayson's attack on Dan Webster.

In today's MTV short attention span 10 second sound bite world, the media can easily manipulate the 90% of the population that are the "unthinking masses". They lack the critical thinking skills necessary to put 2 and 2 together to get 4. Unfortunately, in today's society, the world is much more complicated than 2 and 2. The media, the government and complicit so called capitalists industry (which they are not) have complicated things so much that we're way past 2 and 2….we're easily at 3 and 3 and with the housing market derivative meltdown we're at 4 and 4.

Asking 90% of the population to put 4 and 4 together is ridiculous…..you may as well ask them to explain how gravity works.

Ken Drees writes:

Looking back at 2010 and market / news coverage related trades I would confess that I missed a big one–being taken in by fear even when intuitively I knew I should have tried to buy that fear.

BP

The coverage was oppressive. Obama was going to keep a boot on the throat, x billion was for "starters". BP would have to sell off divisions, they would be constantly garnished—every market guy on tv said BP this and BP that but always ended the interview with "Of course I would not buy it at this level yet".

I made up my mind to pass it up since I couldn't figure out how the USgov was going to handle it. BP CEO looked out of touch–yacht racing when he should have been in the bunker, then he gets sacked. Someone was buying all that BP stock and Jeff Watson framed the big picture of how much was spilling into how big an area–but the logic of this was weighed with the fact that cap was still leaking and the blowout may need a nuclear option and the shrimpers were committing suicide.

The news was the most bleak and black–and not only network news but blogs and such. In the end I missed a biggie—there is a lesson to be learned here that I still have not completely distilled out in terms of what triggered me not to even "try" a trade. Even when the leak stopped–it seemed like it would not hold!

George Coyle writes:

Having recently read some books on screen writing techniques, it becomes apparent that certain structures are conventions and are generally present (or should be if one wants to sell dreams to studios for production). Also, the biggest grossing films tend to be either love stories or Horatio Alger style rags-to-riches tales of the poor boy turned not so poor. People love these stories because they allow escape into the ideal growth toward fame and fortune (financial or otherwise) and provide hope. We don't see many modern videos selling being green or moral values either…it is all g5 this, bling that, etc. Take Avatar of late, crippled none-too-bright man on earth becomes champion of a new world, gets the girl, becomes the leader, etc. Hollywood is notorious for sticking with what works and the fact is selling love and rags-to-riches tales just trump the alternatives because who wants tragedy in fantasy or to come out of a situation we paid for feeling bad, life provides more than enough of that. It is a story telling norm and is rarely violated in mainstream commercial profit seeking films. So patterns not only exist, they were specifically tailored to what made a profit last time and will again. As pretty much everyone is seeking more wealth and/or love and wouldn't turn down becoming the hero of a new world we all become fellow travelers on these stories. The stories feed our hope of being something greater.

As for popular media, especially the financial variety, they seem to filter their speakers to suit the topic du jour. During the crisis Roubini was a financial God and was quoted by everyone I knew but he doesn't get near as much air time at present with the spx nearly double the crisis lows. Should the market collapse again they will undoubtedly trot out the doomsday seers to explain why the longs got it so wrong. Media giants allow price action to dictate program lineups such that when markets go one way or another out come the biggest advocates of that move to tell us all why. It serves as a reinforcing phenomenon and can foster buying more or widespread panic depending on the environment. But I feel people will generally believe what they hear on tv (especially people who aren't market professionals). It would be interesting to see the p n l of following the recommendations of all of the commentators. Who knows if they are telling us the truth or dumping their positions profitably to the general populace.

Galt Niederhoffer writes in with a comment:

Movies have always been a populist medium and the structure of the plot is best suited for very simple ideas to be proven or disproven with beginning, middle and end. I don't think writers are socialists by nature. I just think that movie plots best lend themselves to tales of good and evil and it's easiest to prove the error of new, mass or radical ways than the opposite.

Gary Rogan writes:

The most important tool at the disposal of the information industry is choosing what not to cover. If it's a politician they like, they will not cover significant concerns about their background, like the lack of basic information about their past. If it's a financial bailout, etc. they will create an illusion that there is a consensus supporting it by concentrating on those with the "right" opinions.

Dec

14

We the specs talk a lot about survival and deception respectively. I decided to do some research on deception and associated clues as it impacts both topics. However, the real impetus for digging into this came from re watching the scene with Dennis Hopper and Christopher Walken in Tarantino's True Romance. At one point in the scene the aggressor, Walken, says,

Sicilians are great liars. The best in the world. I'm Sicilian. My father was the world heavy-weight champion of Sicilian liars. From growing up with him I learned the pantomime. There are seventeen different things a guy can do when he lies to give himself away. A guy's got seventeen pantomimes. A woman's got twenty, but a guy's got seventeen… but, if you know them, like you know your own face, they beat lie detectors all to hell. Now, what we got here is a little game of show and tell. You don't wanna show me nothin', but you're tellin me everything. I know you know where they are, so tell me before I do some damage you won't walk away from.

The scene itself is powerful but very dark and graphic. But the whole thing got me thinking, do there really exist a set of 17 to 20 pantomimes or any universally accepted set of rules to detect deception?

I did a little google research and found some articles which tended to identify the same culprits over and over: lack of eye contact, body language, lack of details, long pauses, defensive/offensive behavior, touching the face, nervous movements, pupil dilation, trusting one's instinct and intuition, etc. They quoted psychologists and interrogators but without much supporting evidence. Forbes had a pretty good article on the topic. But there existed no specific set of "laws" so I decided to go a little further and investigate academic papers and CIA/Law Enforcement style publications (the agency writes some incredible manuals). Apparently, at the municipal levels of police work the interrogators generally assume guilt from the onset. The higher ranking government agencies, when dealing with suspected terrorists for example, use techniques like waterboarding and various other fear inspiring methods which are of no use in everyday life should you enjoy life outside prison. Not much help there so I moved to academia.

Saul M. Kassin wrote a paper entitled "Human Judges of Truth, Deception, and Credibility: Confident but Erroneous" in which he says research on the subject has pointed to the fact that in laboratory studies people are generally right only 55% of the time (vs. the 50% coin toss) in detecting deception yet they are very confident in their abilities. Kassin says closing one's eyes and listening tends to result in more accurate lie detection as the cues generally come from, "pauses, hesitations, changes in pitch, and increase in speech rate." But this also assumes you aren't dealing with someone who just talks faster or with an accent (think NYC speech vs anytown, USA). How does one define the control group?

At U of Texas James Pennebaker has developed a linguistic writing analysis software program that is said to be able to identify liars (with 67% accuracy) by virtue of: 1. fewer first person pronouns (i.e. they don't take ownership) 2. More negative emotion words (presumably as they feel guilt) 3. fewer exclusionary words (but, except, nor). However, all of this would only work if someone would submit to a writing test (and had a decent command of the English language). Rachel Adelson in APA Monitor 2004 says deceivers without adequate preparation take longer to respond but those with a rehearsed story begin more quickly. There were some physical cues but the article wasn't that convincing. They also found verbal patterns alter for liars (voice pitch).

This all seems suspect as well since most people view public speaking as the bane of being alive. Seinfeld's joke that most people would prefer to be in the coffin to reading the eulogy comes to mind. Either way public interrogation undoubtedly changes people's methods of communicating. Even if innocent, I am fairly certain someone facing a life sentence would be a bit excited. Or in matters concerning large sums of money people often have difficulty remaining calm…is that broker trying to trick me or is s/he busy and flustered? In the end the whole thing is subject to confirmation bias like so many numerological claims. Simply put, you find whatever you are looking for just by virtue of the fact that you are looking for it. Is that person a liar or did his/her nose itch?! There does not seem to be a clear means to determine with any real degree of accuracy without a large amount of detail and cross examination.

Based on modern research, Tarantino seems to have just written exciting dialogue without any truth behind it. In an unintended twist, while this post hasn't done much to identify deception quickly and easily it probably helps those who would lie to hone their craft. The best laid plans…if anyone has any related info I would love to hear it.

Pitt T. Maner III writes:

A little time back there was a discussion of Ekman's facial research and whether left brain techniques can truly tell what someone is thinking or what they feel in their heart.

I think that reading facial cues though can give clues to deceptive behavior (maybe with the exception of emotionless sociopaths or people who have trained themselves to respond differently or with a poker face). According to Ekman there is a universality to how facial muscles express and reveal emotions.

For a nominal fee of $69 you too can read faces in 1 hour's time. To be tested ….

"METT Advanced will improve your accuracy, as it has more practice and training items-and a review section for additional training than the original version. It will take about one hour.

METT Advanced-Online only This training is meant for those whose work requires them to evaluate truthfulness and detect deception - such as police and security personnel, and those in sales, education, and medical professions . If you should achieve the minimum target score of 80% or higher on the post test, a certificate of completion will be emailed to you . A minimum score of 80% or higher will grant you a certificate of satisfactory completion, a score of 95% or higher will grant you a certificate of expertise.

You can continue to access the training for refresher purposes."

It would be interesting to be proficient in this area and to try to read all the CNBC analysts and stock promoters. There was a guy, for instance, who hammered Netflix last week and was so negative it was almost too much. Did he really believe in what he was saying? How can one be sure without researching his arguments? I guess he was right today …

Heh, and there is a TV show related to the subject. On tonight I believe. Haven't seen it but might be of interest.

LIE TO ME is the compelling drama series inspired by the scientific discoveries of a real-life psychologist who can read clues embedded in the human face, body and voice to expose the truth and lies in criminal investigations.

DR. CAL LIGHTMAN (Tim Roth) is the world's leading deception expert. If you lie to Lightman, he'll see it in your face and your posture or hear it in your voice. If you shrug your shoulder, rotate your hand or even just slightly raise your lower lip, Lightman will spot the lie. By analyzing facial expressions and involuntary body language, he can read feelings ranging from hidden resentment to sexual attraction to jealousy. His work gives him the knowledge and skill set to expertly deceive others as well as detect lies.

A Webmistress adds:

George, you should check out my favorite blog Eyesforlies.com– she is a true expert on detecting deception with a 99. something percent accuracy rate on high profile cases where she knew people were lying before the truth was known. She says there are no hard and fast ways to know if people are lying, and all the sites and articles that tell you things about how looking to the left or itching your nose or even using facial expressions alone to detect deception are totally misleading and off.

The way she usually analyzes lies I've found after reading all her blog posts for two years is she tries to see whether the things people say and the emotions they show on their face when they are talking about their crime make sense… like if a person is radiating a glow when they are talking about their child being killed by an intruder, they probably were not an innocent bystander in the crime. A parent who loved their child would remember that night as the most horrifying event of their life and the emotions they experienced during that event would come back to them as they remembered it and would show on their face. If they are experiencing joy for whatever twisted reason as they are remembering the event, then something is obviously off. A lot of times people's emotions do not match their stories.

Also she analyzes what people say when they talk about a crime. When people are lying sometimes they don't make total sense because it's hard to lie…you are fabricating a story and you have to think and constantly censor yourself. But when you are speaking the truth from the heart, it just flows….So often people say things that don't make any sense or indicate what they actually did rather than what they say they did…

Those are just some things I see her doing, but she always emphasizes there are never any rules in detecting deception. The site is great–I've learned a ton from it.

Stefan Jovanovich comments:

Penebaker and Kassin's investigations confirm once again that baseball is the key to finding the truth in life. If you square up a baseball every time, you will hit .500 (the high school batting averages over .500 are attributable to the poor quality of the fielding). When Ted Williams hit .400, he was, in fact, 8 for 10. A quality player hits .300 - i.e. squares it up 6 out of 10 times, one more than a coin toss. May we all hit .300 for these holidays and the years to come.

Dec

7

Does anyone have good thoughts or conventions on how to factor entry/exit slippage in futures markets? I am trying to find a general rule and google searches of academic papers result in not a lot and what I do find is a bit in excess for my needs.

My thought was to assign a rule such as when my entry/exit sizes combined total <0.50% of the average daily volume it would be safe to assume 1 tick worth of slippage per side. Ex. bid/ask 500/500.25 then assume sell/buy price at 499.75/500.50 (assuming a market that trades in 0.25 increments). Granted this would not happen in all instances but very likely not all fills would be at disadvantageous levels so the average slippage over time of this magnitude seemed fair. The scale could be increased as the percentage of average daily volume increased (i.e. <1.5% assume 2 ticks, <3% 3 ticks, etc.). A time of day factor might also be useful (i.e. pit vs electronic hours) as the liquidity is certainly better at peak trading times. Without very robust data this is difficult to test/determine so I wanted to see what the specs think.

Larry Williams comments:

It depends on the market and also on news of the day. Sometimes there's no slip at all other times it's massive so a decent trader would factor such things into his or her trading style; the problem is mechanical systems have trouble doing that which an individual can do.

Phil McDonnell writes:

There is no slippage with limit orders. Either you get your price or do not trade. If your testing can make a decision based on previous time periods. Then a simulated limit order can be placed. If the low for the next period is below the limit then you got filled on a buy. If the high is above the limit then you know you got filled. The tricky case comes in where the limit is exactly equal to the respective extrema. In that case I would suggest two ways of testing.
1. Assume 50:50 chance of a fill, take them at random.
2. Assume no fills at the exact bottom tick or top tick.

I recommend doing both tests. The 50:50 is probably realistic, but the no fills scenario tells you if the system might depend heavily on getting these top and bottom tick trades.

Larry Williams writes:

Phil's point is why I buy a small partial position on stop, then rest on a limit. This has helped my short term trading a great deal.

Jim Lackey comments:

One should always be a gentleman here. How to trade is the easy part. How much to trade, when to trade and when to exit a trade are the difficult questions.

You can get partial fills, sub penny or fractional orders. Your limit is like a big round number for order sniffers HFT's other traders once made public. Everyone knows we should scale into positions.

When volatility is very low and liquidity is very high it's much easier to enter with out slippage.

The original mechanical question should be adjusted for volatility. I remember 2 times in year 2000 and again in the fall crash of 2008 where I used basically market orders with a price limit. Simply bidding through the current price to start + X ticks to start a scale or to end one. Back in those days the markets might rally 3% in an afternoon so you had to get some on.

Opens and closes are best to use at the market orders. However for the mechanics market at open or closes can be the best or the worst price of the day then your in either deep trouble all in on the high tick, a trend down or lucky you caught a trend day up.

The problem has been that since the markets have become more mechanical its the big up opens that continue to go up and the down opens that have gone straight down. These are order ladders and the moves are over by 10am. It was confusing to see the markets gap big and the entire day over by 10 or 11am. Now we are used to it…perhaps time for a change.

What is wild is to see the govie bond markets move a couple percent a day and the SNP move 1% and the ebbs and flows between stocks bonds and those indexing commodity etf's for investment over the next 100 years are guaranteed to lose.

Chris Cooper writes:

I often have the problem called "adverse selection" with my limit orders, in forex or futures. This is not a problem with small orders, but when your order is larger, you may (frequently) see a partial fill, then the market turns around in your favor and you make a profit. But the profit is not as large as it would be if your order had been filled to completion. The times when your order is completely filled, the market has moved through your price point and past it, usually. You are sitting on a loss if marked to market, and that loss is for your entire size. In other words, you get the bad fills when you really want to be filled, and the good fills when you don't want them (in retrospect). It's a big problem for short term trading.

Similarly, in markets with a long order queue such as ES, by the time your order is filled the market has pretty much moved past you and you are sitting on a loss. Unless you can play games with pre-positioning your order in the queue, you will always see this slippage with limit orders.

Jonathan Bower writes:

You "could" avoid posting your limit order for bots, hfts, etal especially if it is of consequence (size) by working it semi-"silently" in an attempt to not get "screwed". One of the earliest execution algorithms was the "iceberg" where a limit order could be placed in (user defined) pieces, once taken out another one will replace it until your order is filled. Of course this is easy for those who want to to sniff it out. More recently you can add variance to your lot size firing in somewhat random orders as part of an iceberg. Or you could set a timed order to release a limit order (or combination of orders) based on a print, bid, or ask with what/if OCO ammendments, etc etc etc.

The bottom line if you need to be and can be creative with order execution especially in illiquid markets. Of course being right about the trade idea is still the hardest part…

Chris Cooper adds:

GLOBEX does not have liquidity that is as good as the forex interbank market, especially in the Asian hours. If you are trading smaller quantities, in New York hours, then futures are a better choice than forex.

If you are not getting filled when you should be, then your forex broker probably has what is called a "last look" provision in their system. This allows the liquidity providers a chance, say for 30 seconds, to decide not to fill your limit order. This has been an annoying problem for me in the past. The solution is to switch to a broker without this provision. It could also happen if your broker is not an ECN, and in that case you should find a new broker.

Jeff Watson adds:

There were (and still are) some people in the pit who made an excellent living with just the ability to tell when the market is going from quarter bid to quarter sellers. That, in itself is a huge edge.

Sep

11

I am doing an independent study in grad school regarding the predictability of movie revenues. I recently purchased a primer to become acquainted with the inner works of the biz. The book is titled, "This Business of Film" by Greenwald & Landry. As I spent several years in various fundamental equity shops, it strikes me this could be an area primed for M&A activity. The industry is dominated by the 6 major studios.

Some fun facts: approx 33% of films made are studio films, studios get 90% of industry revenues, new technologies are always feared but usually result in longer term revenue (sound, TV, video, DVD, cable, etc.), barriers to entry are very high, new technologies are generally allowed to incubate in smaller companies before being adopted by the studios, verticle integration is big in the industry. Right now the new thing is online exhibition and the market is dominated by, yup you guessed it, AAPL and AMZN. A few more facts: theaters account for 20% of revenues, TV 34%, and DVDs 45%. WMT controls 40% of the DVD market with TGT, NFLX, and BBI accounting for most of the rest. Target audiences are going to theaters less so the internet based models stand to work better. We all know what MP3s did to CDs. All these facts make me ask a few questions:

1. If DVDs go the way of CDs WMT is in a bad way, would they buy a company with online exhibition abilities vs building in house?

2. AAPL is the 2nd biggest market cap company in the SPX500 (behind XOM) and they have the exhibition medium (ipods) and the distribution medium (itunes). A media conglomerate likely doesn't have the market cap to buy AAPL. How long until AAPL considers getting into the production business? Depending on their legal status, they may be able to get an exemption from hiring union labor thus lowering their production costs.

Unfortunately, it doesn't seem a lot of the potential players are public but food for thought.

Stefan Jovanovich comments:

Sound did not "result in longer term revenue" for the motion picture studios for individual pictures; its effect was the reverse. It merged movies with radio and gave the public the same expectations: that there would be a new picture at the theater every week just the way there was a new script for Jack Benny on his radio show. The studios did everything they could to break that expectation by developing "epics" and building up "stars" so that they could hold over pictures for additional weeks, but they never really succeeded. That explains why the aristocracy of Hollywood hated television at the same time the people who were used to B picture production schedules - Lucille Ball, Dick Powell, for example - were busy creating their own mini-studios for TV. As your numbers indicate, online exhibition only accounts for 1% of current revenues; do you have any idea how much of that is going to Hulu?

Sound hurt revenues per picture because the audiences demanded new movies each week just the way they expected to hear new radio shows. Total revenues went up, but profits went down. The financial history of the motion picture business in the 30s is one of rising revenues and continuing restructurings. In that sense, George may be absolutely right; as profitability falls in an industry, people look for ways to lean against each other.

The economics of film production remains horribly simple: make once, show many times. Chaplin's silent comedies ran for months and still sold out. Birth of a Nation was an unimaginably big hit in the same way. There is no way to comprehend what a marvel the "movies" were in the 1920s and how thoroughly they captivated people's attention all over the world. Chaplin's Tramp and Rudolph Valentino's Sheik were universal icons in a way that no one - except possibly Muhammed Ali at the time of the Thrilla in Manila– has ever been since. Nothing in "talkies" came close. If you want to see what sound did to the profits in the movie business, United Artists is a perfect example. Nobody built Pickfair in the 30s and the "artists" never again could seriously try to take over the asylum after sound came in the way Douglas Fairbanks, Sr., Mary Pickford, and Charlie Chaplin had.

Aug

16

In the Dictionary of Theories, which contains an enumeration and 2 par explanation of 5000 different theories, I come across the question of how many theories in different fields have applicability to ours. The question makes one think that there are vast areas for formulating hypotheses and that many simple theories in one field are applicable in others. The almost exact relation between electricity and magnetism, and the many dualities in different fields leads one to search for general theories as well.

One of the most suggestive theories I came across in the dictionary was the Correspondence Theory. It says thats what true of the microscopic level is true of the macroscopic. I wish that were true. I studied the bid asked 50 years ago, and found many regularities. I have made a few augmentations at the microscopic level since then, but one wishes that they held up at the macro level.

One notes that when I found that closing prices tended inordinately to cluster at the round numbers in 1962 operation research, my thesis adviser at the flexionic university said I'd have a hard time getting it through the acceptance mill since it was really not economics. But now I note that almost half the articles in AER are of a market microculture level or expectations relating there to level.

Alston Mabry writes:

Concerning your thesis, this is a good example of how the quantity of new theories and published papers is related to how much work is required and what tools are available. Studying market microstructure is so easy now compared to back in the day.

Aug

4

On my ride home on metro north the other day I was sitting backward (relative to the train direction) staring at the power lines watching them appear to dance along by virtue of the train's moving (a reasonably decent form of entertainment when toting a dead computer and no book) when I noticed they resembled approximate mirrored images of stock chart patterns. I say mirrored because gravity was pulling these power lines down but the various towers and poles obviously prevented this from happening. Stocks tend to drift higher pulled upward by demographics, globalization, technology, earnings but with occasional corrections similar to the inverse of the tower's impact on power lines.

Naturally the depth, size, and nature of the poles/structures supporting the power lines varied in conjunction with the size, weight, and quantity of the power lines. This made me curious if anyone had any similar thoughts about this relationship mirrored on stocks or if I am too far out in left field. My gut feeling is there may be some way to test the market's resiliency and correction frequency/depth utilizing some combination of market "weight" metrics (NAV, breadth, put/call, AUM of etfs, P/E, etc.). Perhaps viewed in association with the rules of gravity governing objects but altered and reversed to account for the upward motion of markets over the long haul (potentially utilizing the growth factors mentioned above).

The whole thing reminded me a bit of Charles Dow's "Dow Theory" predicated on the ripples/waves/tides evident in bodies of water. Power lines do remain largely taut and parallel to the ground while markets can go parabolic, but it seemed like adequate food for thought for the list. So I would like to subject the concept to the intellectual acumen and experience of the readers of this site should you be willing to pose any thoughts or suggestions?

Jul

18

Is it me, or is it easier to bluff and steal a pot when the pot is small and less is at stake? It seems like players are not quick to defend or contest when the stakes are "not worth it".

Can this be seen in markets? Do sellers dump near lows or not care to squeeze you when you are trying to trade through their midst when action has lost its edge? What are some examples where the markets let you steal a little–out of nothing more than fatigue or lack of interest?

George Coyle writes:

I think about this often but in a different way. Looking at the concept of the bluff from another perspective, the amount of capital a player has certainly influences play and outcomes in both poker and markets. The person at the table with the most chips can often “lean” on the other players without much risk. As an example, if the pot was say $25 then the person with $250 in risk capital will be exponentially more averse to attempting the bluff (or holding on to a questionable hand) than the person with $2500. In instances where you hold the majority of the chips the cost to see how things play out and/or wait for a potential reversal of fortune or increased probability of success with new cards coming out (or information/prices in markets) is worth it more often than not so long as the stakes don't get too high relative to your risk capital (unless you truly have a terrible hand then discipline is prudent). The blinds (commissions/spreads in markets) will eat away at the little guys in the meantime to the tune of a much greater % of holdings. Leads me to wonder if there are any studies to this effect showing the tipping point wherein an uneven distribution of holdings presents an inevitable conclusion in outcome (i.e. the big fish wins/the rich get richer) should the majority holder choose to play conservatively and never risk too much going “all-in” (and barring social revolution)? I would imagine Warren Buffett rarely gets margin calls and his “genius” at this point could just be by virtue of having the most chips and ultimate staying power (mindful that he did manage to get himself to his current position).

Similarly, I would imagine the player with the most chips wins hands s/he probably shouldn't (statistically speaking) by the same virtue. The film director Oliver Stone said, "Luck comes from persistence and talent. If you're talented your luck will eventually come." Perhaps this is the root cause of lots of modern success, a little well timed luck leading to a "lean" advantage which serves as a self-reinforcing phenomenon. In horse racing they use "claiming" races to account for this effect. These races have a fixed cost where the horse can be bought should anyone want to pay the cost. This keeps the $20k horses from consistently stomping the $4k horses (the owner of the $20k horse entering the $4k race would run the risk of having to lose $16k selling his horse at $4k). It would be interesting to see how markets would play out if a similarly tiered structure existed.

Scott Brooks adds:

Ken is right. When I played poker in the 80's (I played strictly 7 card stud back in the day), the size of the pot mattered. But at the same time, it also had to do with the pain associated with the final raise. Of course, the final raise wasn't the end all be all. It was the build up to the final raise……i.e. slowly suckering the guy in with a series of raises that were painful, but not so painful that he wouldn't make call the raise, or even raise the raise.

It was also helpful if earlier in the night you had the nut hand and suckered him into a sure loser hand (loser hand for him). It was key that when you suckered him into the sure loser that you not make the loss too painful. Save the pain for the big bluff to come later that night (or on another night….it might be weeks before you get cash on this set up).

One of the keys with this set up (I'm sure professional poker plays have a name for this set up, but I don't know what it's called) is that after you sucker him into calling your last raise, you show him your cards and tell him, "Fred, I'm sorry man, I stole it from you" (or some similar phrase). But it's very important that you show the cards in a humble manner, with a contrite look on your face, and say the words "Fred, I'm sorry man, I stole it from you", in the kindest most humble manner possible, looking almost ashamed. You are conveying to empathy to him.

But if you did all that right, later in the evening or even weeks later, you could sucker him into a big bluff. But you have to use this bluff wisely. You have to make sure that he's got a decent, but not great hand. You have to use your best judgment to determine that he has, at least a high straight but no more than a low full house. And you have to make sure that your hand is mystery to him, but that it doesn't appear to have the potential to be too big of a hand.

You have to slowly sucker him into matching raises or raising raises and suckering him in without him noticing the financial commitment he's made and how painful losing at this point would be. He needs to think that your bluffing again. You then hit him with a big raise, a raise large as to be painful……so painful that you can almost always see the fear on his face.

You can see the fear in his eyes as he realizes, "I've got a lot of money in this pot and losing this pot now would hurt, but I'd survive. But if I call his raise and lose, I'm gonna lose my house payment for this month".

At that point, you have them. The fear of losing this months house payment is too much and they usually fold out of fear.

You can then decide whether or not to show him your cards (since he didn't "pay to see them….i.e. he folded), either way, be gentle.

Later in the evening, make sure you're compassionate to him. For instance. If later on you have the "nut hand" and he wants to keep raising you (i.e. he thinks he can beat you), tell him, "Fred, I've got the nut hand". If you've done things right, Fred will know that you're being honest with him and fold. Show him your cards and let him know that you really did have the nut hand.

That way, Fred will have a good feeling about you (and feel less bad about his earlier losses) and will want to come back to the table, night after night after night so you can slowly bleed him of more and more capital.

That is how poker players bleed gamblers dry.

And that is why I quick playing poker. I couldn't stomach what I was doing. I loved the money, but not how I was making it. I couldn't look myself in the mirror.

If I win a trade or beat out a competing businessman I can feel good about that win. But I felt like a hustler win I took money from the "Freds" of the world.

Gains without integrity are hollow and empty….and if they're not, then you are a hollow and empty person. I was not that person. So I quit.

Jun

22

Although not a new documentary (2005), I watched Grizzly Man this weekend (currently available on free movies on demand for NYC area TWC subscribers). It is the story of a man, Timothy Treadwell, who decided to move out into the wilds of Alaska to live with grizzly bears in an effort to “protect” the bears from what he perceived as their enemies (poachers, hunters, and to a lesser extent the parks division). In the process, Mr. Treadwell was fighting his own demons and using this life choice to enable a personal transformation of sorts over his 13 years on the job. The documentary was directed by Werner Herzog a notorious maverick and seasoned director deserving respect for his fearless attitude as well as his unrelenting commitment to his craft.

While being entertaining and visually stimulating, the film provides an interesting look into devotion, goals, and the need to blend dreams with reality (an ability Mr. Treadwell lacked with all too unfortunate consequences). I believe the documentary holds certain lessons and truths about respecting “nature” which are applicable to investing. Mainly, we all must respect the nature of the animal (be it bear or market) and becoming overextended or overly confident in positioning can have dire consequences financially or otherwise. While not a profound realization, it is interesting to see concepts such as this manifest themselves in various non-financial realms of life. Mr. Treadwell became too comfortable with the animals from too many years without incident and seemed to have forgotten the nature of what he was dealing with, a concept not alien to those of us in the speculation business. All things considered, I will certainly take Treadwell’s story to heart in future endeavors.

Jun

1

Here is the price change for various markets (expressed in US dollars) from the start of the year 2010.

(Source: Bloomberg).

The "YTD Ahead/Behind" is calculated by assigning each market a base index value of 100 as of 12/31/2009, then multiplying this base index value by the respective % change for the year (ex. +20% YTD would produce an index value of 120). After, the average of each league is calculated and subtracted from the individual current index levels to produce the amount ahead/behind.